Asia faces fiscal dilemma
Asia faces fiscal dilemma
By Alan Wheatley
TOKYO (Reuters): The large public debts chalked up tackling
Asia's financial crisis have come back to haunt the region's
governments as they seek to cushion their economies from a global
slowdown.
The debt burden is already so great in some countries,
especially Indonesia and the Philippines, that most economists
now view a fiscal blow-out as a much larger risk than a re-run of
the region's 1997 balance-of-payments crisis.
"The ability of the poorer countries in the region to maintain
deficit spending is fast approaching its sustainable limit,"
Lehman Brothers' Asian economists said in a report.
"Unfortunately, while the parlous state of government finances
is of growing concern to markets, political distractions are
preventing countries from adequately facing up to the reality of
their public debt problems," they said.
Debts ballooned during the crisis as governments took banks'
non-performing loans (NPLs) onto their own books.
As a consequence, while private-sector debt has fallen as a
percentage of gross domestic product in all five countries worst
hit by the crisis, public-sector debt has quadrupled in Indonesia
and Thailand.
In the Philippines it has risen further to around 110 percent
of GDP, the highest in the region.
What alarms economists and officials is that in most countries
the taxpayer's bill for the bank clean-up is still rising.
Goldman Sachs says the official 15 percent figure for NPLs in
the Philippines does not include sour loans in the non-bank
financial intermediary sector, while ING Barings says the new
Thai government's plans for a national asset management company
to buy up NPLs could cost 5.1-7.2 percent of gross domestic
product.
As William McDonough, president of the Federal Reserve Bank of
New York, said in Bangkok on Monday: "Contingent liabilities
often remain significant, raising some concern about potential
future debt growth."
Not all countries are in a fiscal bind. Economists say
Singapore, Hong Kong and Malaysia have plenty of scope for pump-
priming if need be.
Taiwan, despite an untackled NPL problem of its own, could
afford last week to announce an increase in public infrastructure
spending this year of NT$111.5 billion (US$3.5 billion) with the
aim of boosting GDP growth by 0.7 of a percentage point.
But Adam Le Mesurier of Goldman Sachs in Singapore said the
countries that most need to support growth as exports flag are
the ones least able to afford to ease fiscal policy.
"They used their fiscal bullets pretty early on in the game
after the crisis in 1997-1998 in terms of socializing the bank
liabilities in the system. Once you've shot those bullets, it's
difficult to come back and reload," he told Reuters.
Le Mesurier said the case of the Philippines' debt burden was
especially sobering. Even on optimistic assumptions for real
interest rates and the annual budget, Manila's public-sector debt
is sustainable only if growth is strong, he said.
The risk is that a vicious circle will develop.
If the fiscal position deteriorates further, capital flight
will increase as taxpayers seek to avoid future tax increases,
cutting into investment and making it harder to achieve the
growth rates needed to stabilize the debt.
Ultimately under that scenario the government has to resort to
the money-printing presses to plug the budget gap. That fuels
inflation, driving the currency and real interest rates lower.
Le Mesurier said the next year would be critical in
establishing whether the new administration of President Gloria
Macapagal Arroyo, which has pledged to improve tax collection,
can reverse or stabilize the fiscal position.
"The issue will likely remain the single most important
determination of the underlying direction of the Philippine macro
risk premium," Le Mesurier said in a report.
The other country debt-watchers are monitoring closely is
Thailand. As well as offering plans to manage the country's bad
assets, incoming Prime Minister Thaksin Shinawatra ran for
election promising to grant each of the country's 70,000 villages
one million baht ($23,580) and freeze poor farmers' debt
repayments for three years.
For now, economists are not too alarmed. Arthur Woo of HSBC
said a strong dose of fiscal expansion was a timely tonic for a
slowing economy. John Tsao of JP Morgan Chase said Thailand's
public debt, nearing 60 percent, is sustainable provided growth
continues and privatization and tax reforms are accelerated.
"For a quarter or two it's not going to kill them, depending
on the size of the package," Sailesh Jha of the Asian Development
Bank in Manila agreed.
But he said pump-priming for Thailand and other Asian
countries could achieve only so much.
"Given the open nature of these economies, it can only be a
short-term stabilization measure for a few quarters. That's about
it. Then it depends on how quickly the domestic sector reacts
both in terms of consumption and investment," Jha said.