Troubled Asia strives for more funding

Troubled Asia strives for more funding

HONG KONG (Reuters): Asia's most crippled economies are widening budget deficits in a bid to stimulate domestic demand and head off social unrest -- but funding some of those deficits could require fresh international loans.

All the countries operating under guidance from the International Monetary Fund -- Thailand, South Korea and Indonesia -- are expected to report budget deficits this year, even though balanced budgets were once a condition of IMF aid.

Analysts said the IMF agreed to South Korea's budget deficit because its external position has stabilized. Foreign exchange reserves are rising having already reached end-year IMF targets.

The currency is also gaining support from a large current account surplus. A big compression in domestic demand sucked the wind out of imports, allowing the current account to move into surplus despite little evidence of an export-led recovery.

"Korea can run a budget deficit because the current account surplus is much larger than originally predicted," said Stephen Taran, global head of sovereign risk at Salomon Smith Barney.

Unlike Thailand and Indonesia, South Korea is expected to tap domestic bond markets to pay for its deficit. But neither Indonesia or Thailand -- which wants IMF approval to run a budget deficit of $20 billion next year -- operate domestic bond markets. This means international assistance will be required.

Last month, Jean-Michel Severino, the World Bank's vice president for East Asia and the Pacific, urged the Group of Seven industrial nations to help pick up Asia's deficit tab.

"I think the key is that East Asia matters for Japan and Japan matters for the G7," Severino told Reuters Television.

But some analysts said Asia would have to prove its willingness to help itself before seeking help elsewhere.

"International assistance will be required but they (Asian nations) have got to be prepared to pay the price," said Chris Tinker, regional head of economics at ING Barings in Hong Kong.

The situation is most urgent in Indonesia, where the IMF recently approved a revised bail-out package that included a 1998 budget deficit of 8.5 percent of gross domestic product.

Rather than signaling an improved external position, analysts said the deficit confirmed the IMF's new willingness to adapt to Indonesia's critical situation.

The risk of social unrest is rising in Indonesia, where more than half the population of 200 million is expected to be unable to afford basic food by the end of this year.

This deficit promises to become the most troublesome to fund. Indonesia is prevented under the constitution from seeking domestic budget financing. Established in the 1960s as a tool to fight inflation and impose fiscal discipline, this rule could force Indonesia to appeal for more international aid.

Taran said that out of Indonesia's $54 billion in public sector debt, cheap and long-term loans from multi-lateral agencies such as the World Bank, the IMF and the Asian Development Bank will remain untouched because net cash inflows exceed service payments. And issued sovereign bonds amount to little more than $1 billion, requiring minimal service.

More likely would be renegotiation of bilateral aid, or concessional loans from donor governments, led by Japan.

"It comes down to a Paris Club arrangement, where everyone sits down and decides how much to reschedule," Taran said.

An ad hoc forum which meets in Paris, the Paris Club allows Western creditor governments to discuss the renegotiation of debt owed to official creditors or guaranteed by them.

"But I think there will be ways of arranging things so that doesn't happen," said Taran. "It's messy. Governments can avoid that by ponying up (lending) more so the Indonesians can pay them back. That's more likely."