ASIAN INTELLIGENCE An Independent Fortnightly Report on Asian Business and Politics No. 822
Wednesday March 9, 2011
Fiscal Deficit / Surplus as a Percentage of GDP in 2010 Percent 6 4 2 0 -2 -4 -6 -8 -10 -12
4.1 2.4
-1.5
-2.7 -2.7 -2.9
-3.8 -3.9 -4.6
-5.6 -6.0 -9.2 -9.6 -11.1
REGIONAL OVERVIEW ..................... 2
PHILIPPINES ....................................... 8
CHINA .................................................... 3
SINGAPORE .......................................... 9
HONG KONG ........................................ 4
SOUTH KOREA .................................. 10
INDIA ..................................................... 5
TAIWAN .............................................. 11
INDONESIA .......................................... 6
THAILAND .......................................... 12
JAPAN .................................................... 7
VIETNAM ............................................ 13
MALAYSIA ............................................ 7
EXCHANGE RATES ........................... 14
POLITICAL & ECONOMIC RISK CONSULTANCY LTD.
Political & Economic Risk Consultancy, Ltd.
Issue #822
REGIONAL OVERVIEW Fiscal policy controversies push up risks Asia’s economic cycle is entering an awkward period in which the odds are higher than usual that governments will be sacrificing economic prudence for political expedience. Back in 2008 and 2009, Asian governments almost without exception stepped up their own spending and relaxed credit in response to the global economic recession. Last year, as economies found their footing, most governments started to rein in their spending and tighten up on monetary policies, depending more on the private sector and foreign trade for growth than on fiscal stimulus. This year most governments were expecting to tighten up their austerity programs further, but populations want relief from rising costs, and this could be expensive. The rise in social and political turmoil in Egypt, Libya and other developing countries in the Middle East and North Africa has made Asian governments sensitive to similar risks they might face. Authoritarian regimes like China and Vietnam, on the one hand, are cracking down on dissent, while, on the other hand, trying to pay more attention to complaints about corruption and deteriorating living conditions. In more democratic systems in which elections are forthcoming, governments are worried about losing popular support due to growing frustrations of the voting public. The governments of both types of political systems know that one of the reasons people are so unhappy with their governments is because of rising food costs. India has already experienced protests because of people’s unhappiness with inflation, while even at the other end of the spectrum in Asia, in wealthy economies like Hong Kong, there has been an increase in protests by people demanding that their governments be more sensitive to social needs and not be too miserly. Few Asian governments have the political will to ignore these pressures. The official line might still be the need to reduce government expenditure relative to revenues, but judging from the new budgets that have already been announced by a
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number of Asian countries, emphasis is shifting away from the need for fiscal prudence to the need to provide relief for segments of the public that are having a difficult time. As can be seen in the country entries that follow, with very few exceptions (Japan, for instance) Asian governments are adopting fiscal policies that will either involve more spending or foregoing revenue in order lighten the burden on the general public. Economists are warning that increased subsidies of food and fuels and direct cash payments to the general public will be counter-productive. Putting more money in the hands of consumers will encourage their spending, causing more inflation further down the road. While that remains to be seen, the threat of greater social unrest is immediate, and politicians are responding to the problem at hand rather than to the one that economists say might happen at some point in the future. Although the mood of the population in Asia is decidedly different than the mood of the populations in the US and Europe, the growing focus on government fiscal policies is another example of how the world is increasingly intertwined. Bond markets have already been put on edge by the crises in cash-strapped economies like Greece and Ireland. Now investors in bond markets are worried about fiscal conditions in the US – at both the national and local levels. States like California, Wisconsin and Massachusetts are in serious fiscal trouble, and the public is crying out for radical measures by governments at all levels to make ends meet. As the politicians respond, there is a growing backlash by students, teachers, civil servants and other special interest groups who fear they are being squeezed unfairly. So far holders of municipal bonds have not really weighed into this debate, but if they are ultimately called upon to share in the pain, there is a risk that sources of funding could dry up. Compared with the Eurozone or the US, the debts of most Asian countries are much lower relative to the size of their economies. Japan is the biggest exception. Two major US rating agencies recently lowered their views on Japan’s sovereign debts, citing the government’s inability to solve its fiscal problems. However, it remains to be seen which problem is, in fact, larger from the perspective
ASIAN INTELLIGENCE
March 9, 2011
Issue #822
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General Government Gross Debt as a Percent of GDP in 2010 Percent 250
225.9
200 150 92.7 98.9
100 50 0
0.7
46.3 52.7 55.1 36.1 39.1 45.5 19.1 21.9 26.7
71.8
of preserving social and political stability – the pressure deficit-ridden developed economies are under to do a better job of balancing their budgets or the pressure that most Asian governments are under to spend more to help people who are frustrated with living conditions. The cost of bonds issued by governments and companies in Asia is likely to rise just as they are in Europe and the US, and the whole concept of sovereign risks is being reviewed. In the West, the growing question relates to governments’
ability to repay their debts; in Asia as in the Middle East, the question could be more governments’ willingness to repay their debts – or debts by stateowned companies that creditors thought had sovereign status. The bigger risk common to Asia and the West relates to social stability arising from controversy surrounding fiscal policy. In the West, different groups of people are protesting over attempts by their governments to either force them to accept increased tax, education fees and health care expenses or to do without certain services that people have come to consider as vital. In Asia, different groups are protesting because they feel they have been excluded from the fruits of economic development compared with other groups or because of rising costs and other inconveniences that they feel are in their government’s power to reduce. Governments will have to respond to these pressures in different ways, depending on whether they are in Asia or the West, but it is a close call whether the risk of greater social unrest is higher in some Asian countries or some Western ones.
CHINA Comments With inflation the No. One economic problem facing the government and signs of overheating increasing, the government is trying to put on the brakes by tightening up its fiscal and monetary policies. Premier Wen Jiabao recently revised downward the official target for average GDP growth over the next five years to 7% and the government will shift its priority from growing exports to stimulating domestic demand. The 7% medium-term growth target is more a reflection of the government’s aspirations than an official forecast. Mr. Wen is trying to set the tone; the national government still has to convince the provinces and municipalities in the wisdom of having slower growth. The last five-year plan had a growth target of 7.5%, but the economy actually grew 11.1% annually between 2006 and 2010 – and no officials have been punished for beating the official target. In other words, local officials will believe there is more downside risk to their career from undershooting the official target than there is from exceeding it. The implication is that the national government will have to back up its words with concrete actions – something it has so far been unwilling to do. To be sure, it fiddles with some numbers like bank lending to make it look like it is applying the brakes, but these are more smoke and mirror games than a reflection of reality. This could be the case with fiscal policy in the near term. The central government plans to spend Rmb 9.79 trillion in 2011, 1.3 trillion yuan more than it spent in 2010. The government also estimates that it will be able to collect Rmb 8.89 trillion over the year, which will result in an annual deficit of Rmb 900 billion, down from a planned Rmb 1.05 trillion in 2010. However, the government actually recorded a fiscal surplus of Rmb 515 billion in the first 11 months of last year, implying that there was a burst of spending in the final month of the year – too much
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Issue #822
to have had a realistic chance of actually happening. Second, the finance ministry is forecasting only an 8% growth in fiscal revenue in 2011, compared with a rise of 21.1% in this first 11 months of last year. However, such a slowdown is not entirely consistent with another directive, namely that major state-owned companies in the tobacco, energy and telecoms industry pay 15% of their after-tax profits to the central government, up from 10% currently. Companies in the next group, mainly in the steel, transport and construction sectors, are supposed to increase their dividend payment ratios to 10% from 5%. Thirdly, with the generational change in leadership fast approaching, the government is trying to increase spending on the military and for social services. The push within the military, for example, is to increase its share of total spending from the current level of 1.4% of GDP to as much as 2.8% of GDP in order to close the gap with military technology in the US. Last week China announced that it would boost its defense spending by 12.7% this year to Rmb 601.1 billion. The projected rise is faster than the 7.5% increase in defense spending last year. Such increases are inconsistent with the spending austerity that would be required under the tighter fiscal policy plan. One of the biggest reasons for China’s sustained strong growth has been the government’s ability to build new physical infrastructure fast enough to sustain the increased level of industrial production and consumption. Major state-owned companies in the power sector, airlines, road and railways have led the investment splurge, and Mr. Wen’s call to re-balance growth toward consumption represents a challenge to these state-owned companies. It is important to read between the lines about some major shifts. One could indeed be taking place. Until late last year, the state-controlled media stressed how good a job major state infrastructure companies were doing and how much they would drive growth in the future. For example, China is planning to invest nearly US$800 billion in the power sector in the next five years, up 68% from 2006-2010. Similarly, China is planning to invest annually about US$105 billion in the domestic railroad sector, including the construction of 25,000 kilometers of high-speed track by 2015. More recently, however, the media has been focusing more on the problems of these same sectors and how they have been guilty of corruption and inefficiency. Recent reports have stressed how almost half of the Mainland’s power plants made a loss last year. The Party boss of the Ministry of Railways has been sacked amid allegations that he personally took a cut of about 2.5% from most of the big-ticket high-speed rail projects, and questions are now being asked whether the government’s massive investment in high-speed rail makes sense. The air industry is also coming in for closer scrutiny. Government audits recently revealed that 10 airport projects across the country cost taxpayers some Rmb 159 million in false accounting and tax avoidance. In many cases, contracts were inflated and projects were not open to public tenders as they were supposed to have been. The more recent message that the government has allowed to get out is that there is a dark side to China’s state investment boom that needs to be investigated and eliminated. This could be laying the ground for a big cutback in public sector investment in infrastructure in an attempt to root out corruption and inefficiency. Just as big investment numbers do not necessarily translate into quality investments, lower investment numbers need not actually even mean a slowdown in investment spending, only in the waste associated with these investments. If so, that would be a good thing, but this is not the kind of problem that can be solved quickly or with one or two high-profile examples of punishment. The actual problem is much more complicated and even top leaders like Mr. Wen and President Hu Jintao will have to tread carefully.
HONG KONG Comments
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Hong Kong’s fiscal position is so strong that the government is coming under increasing criticism for being too miserly. As low as Hong Kong’s tax rates are (15% for personal income tax and 16.5% for corporate tax), the government is still likely to show a surplus of HK$71.3 billion for the fiscal year ending March 31 thanks to surging revenues from land sales and stamp duties. A surplus of this magnitude would be equivalent to 4.1% of Hong Kong’s GDP. The government is forecasting that its fiscal reserves will hit HK$591.6 billion by the end of March, equivalent to 23 months of government expenditure or 34% of Hong Kong’s GDP. That does not count the Exchange Fund, which is supposed to back the Hong Kong dollar. The total assets of the Exchange Fund amounted to HK$2,505.0 billion on 31 January 2011. Hong Kong has the lowest ratio of gross government debt to GDP of any country covered by this report. The government also has a habit of over-estimating its actual expenditures and underestimating its revenues. Consequently, the actual Budget surplus normally is much larger than the one the government has forecast. In the year just ending, the revised estimate for total revenue is HK$374.8 billion, HK$82.8 billion higher than the original estimate. Government expenditure for 2010-11 is HK$303.5 billion, HK$13.7 billion less than the original estimate. For the coming fiscal year, the government says it will increase its spending to HK$371.1 billion, up by HK$67.6 billion or 22.3% over 2010-11 (this is one of the biggest increases in government spending by any country covered in this report). In comparison, the government says revenue collection will be flat at HK$375 billion, which will cause the fiscal surplus to shrink to only HK$3.9 billion. However, if the government again spends less than projected and raises more revenue through property sales and stamp duties, the actual surplus for the coming year will be many times larger. While such a balance would be a cause of rejoicing in the US, no sooner had Hong Kong’s financial secretary finished his Budget speech than demonstrators were marching outside the gates of the government to protest that he should have done more to help the public cope with accelerating inflation. This put Hong Kong in step with other Asian countries, from India to Korea. Hong Kong is particularly interesting because the government had already included HK$25-billion worth of sweeteners in its latest Budget that would have been considered generous in most developed countries. For example, the government is waiving public-housing rents for two months, exempting homeowners from property rates, subsidizing residential electricity by HK$1,000 per household and injecting HK$6,000 into the pension account of every worker in Hong Kong. Yet people wanted more, and their demands prompted the financial secretary to promise to hand the proposed HK$6,000 payback directly to people instead of injecting it into the pension fund. Perhaps the most significant development is the magnitude of this pressure for more help from the government. It is extremely rare for the Hong Kong government to be pressured into making major budget amendments so quickly after a new plan has been announced. And this is in a society where government leaders do not have to worry about elections. It is a reflecting of the intensity of the public’s feelings toward this issue and how government leaders (in Hong Kong’s case they are not even politicians but elevated civil servants) are having to modify their policies in response to these pressures, even when the policy changes could aggravate what they consider to be Hong Kong’s Number One problem, inflation.
INDIA Comments The government’s fiscal policies are a reflection of its immediate political concerns: elections in five key states this year. Making matters worse for the Congress Party, which heads the ruling coalition, is that its grassroots support base consists of the very same people who are being hurt the most by high inflation, especially food prices.
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The latest Budget, announced last week, is an attempt to walk a political tightrope. The numbers make sense only in the context of reflecting the government’s immediate priorities. They do not reflect economic reality. The actual spending and revenue numbers for the new fiscal year are likely to differ from the Budget numbers in major ways. First of all, the size of the fiscal deficit is unlikely to decline to 4.6% of GDP as Finance Minister Pranab Mukherjee forecast when he announced his new plan. The national government’s fiscal shortfall is likely to be closer to 5% of GDP, and when the deficits of state governments are included, the general government gross debt will be roughly 10% of GDP. One reason for the larger deficit is that central government spending will probably increase by much more than than 3.4% the finance minister is projecting. Extra spending on food subsidies and social welfare will ensure that happens – and such subsidies are needed if the government is going to have a good chance in the coming state elections. The Congress Party has promised to extend food subsidies to more than 70% of India’s population, and it will index its rural job scheme, which guarantees 100 days of employment to rural poor, to inflation. High world market prices for oil could also push up fuel subsidies by much more than the government is currently budgeting. Another reasons for the larger deficit will probably be a failure of revenues to grow as much as projected. The finance minister forecasts a 25% increase in gross tax collections. However, this assumes a 9% real GDP growth rate, which is not going to happen without a much bigger increase in infrastructure investment than is currently in the cards. It is more likely that the Indian economy will slow in the coming fiscal year than pick up still more steam. With inflation as high as it is, the Central Bank has no room in which to relax monetary policy or lower interest rates. It will therefore be difficult for the private sector to get the capital it would like to expand investments and spend more on infrastructure. Moreover, corruption will remain a big problem, since politicians and civil servants seem to be most greedy when it comes to the opportunity for graft involving big ticket projects like infrastructure. The government insists it is cracking down on this problem, but as yet there has been no evidence of this happening, which is one reason why some of India’s most prominent private entrepreneurs have recently been so outspoken about the need for reform. When their frustrations are as high as they are today, it is more an indication that problems are still building than receding.
INDONESIA Comments Unveiled last August, Indonesia’s Budget for 2011 has been overtaken by events. The original plan assumed an inflation rate of 5.3% and an average crude oil price of US$80 a barrel. In fact, inflation is running closer to 7% and oil prices have topped US$100 a barrel. The government had wanted to hike electricity tariffs by 15% in order to cut the level of fuel subsidies, but parliament refused to pass this increase and forced the government to accept a much lower increase. Now even that modest increase is being reviewed and might be cancelled. In any event, government subsidies will be higher than projected when the budget was first announced last August. This does not necessarily mean that the government’s projection of a decline in the fiscal deficit will be wrong. The budget targets a fiscal deficit equivalent to 1.8% of GDP in 2011, which would be down from 2.1% last year. Although spending on subsidies will be higher than initial forecasts, investment spending is likely to be much lower due to an inability of bureaucrats to stick to project schedules. There are often delays in project preparation, materials procurement, land acquisition etc, because of administrative hurdles, poor coordination across ministries and between central and local governments. Consequently, total spending might not grow by
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the amount budgeted -- by 6.7% to Rp 1,200 trillion (US$120 billion). This is not entirely good news, since the country needs to invest more on such physical infrastructure as power systems, roads, airports and railways. Better infrastructure would help to hold down logistical costs and thereby fight inflation. It would also attract more foreign direct investment, Recent developments in Egypt, Libya and other Middle East and North African countries have caused the Indonesian authorities to rethink their priorities. Instead of focusing on growth and investment, more attention is now being given to helping poorer Indonesians cope with the accelerating rate of inflation. Fortunately, the local rice harvest appears to have been good, which should help to stabilize prices for this important commodity. In February, the finance ministry announced that it will remove the value added tax (VAT) for the sales of houses worth less than Rp 70 million (US$7,910) compared with the previous Rp 55 million; eliminate taxes on the sales of cooking oil and bulk cooking oil for the poor; and provide in advance 50% of the funds needed by the State Logistics Agency (Bulog) for the rice-for-the-poor program.
JAPAN Comments Depending on which figures one uses, Japan’s gross government debt ranged from just over 200% of the GDP (the OECD) to 225% (the IMF). Either way, it is by far the highest for any major economy. Even on a net basis, government debt will reach 120%, compared with 74% for the US. For two years in a row, debt issuance has exceeded tax revenue. The government can still fund itself at a lower nominal cost than any other advanced economy. Domestic demand for government bonds is strong even though interest rates are low. The main immediate threat has much more to do with politics than with economics. It is unclear how long investor confidence can be maintained given policymakers’ inability to push substantive tax reform. Standard & Poor’s recently cuts its sovereign debt rating for Japan, amid heightening concerns about the government’s ability to push through budget-related reforms, and Moody’s has warned it might follow suit. New debt issuance is budgeted to account for nearly 48% of state revenues in the coming financial year. Opposition groups have said they will seek to block bills needed for the deficit financing bonds. The government will need either the approval of the Diet’s upper house (which is controlled by the opposition) or a two-thirds majority in the lower chamber if it is to pass legislation essential for full implementation of the new yen 92.4 trillion (US$1.12 trillion) budget. It is highly likely that this will be a bridge too far for the government of Prime Minister Naoto Kan and that he will either be forced to quit or try to hold on to power by calling general elections two years ahead of schedule. If the country’s politicians are unable to move beyond their squabbling and pass essential budget-related legislation, the government will not be able to issue new bonds and could run out of money by June or July. The possibility of this happening is small, but simply being a possibility has markets on edge because of the implications for sovereign risk around the globe. The betting is that a compromise will eventually be struck once the feuding parties see the seriousness of the situation. Mr. Kan has set a target of achieving a surplus in the government budget by fiscal 2020 amid calls for revenues to be boosted by raising the 5% consumption tax. However, his failure to make any progress toward this goal is clearly costing him voter support. The problem is that there does not seem to be anyone else on the political stage or in the wings who is in any better position to break the stalemate and enact a fiscal overhaul.
MALAYSIA Comments
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Malaysia’s government has been more aggressive than most in Asia in using its own spending to lead growth. Although the gross government debt is higher than in most other countries covered by this report, the country’s relatively small population and wealth of natural resources means the downside risks of this aggressive fiscal policy have been limited. Most of the public debt is domestic -- less than 4% was external debt at end-2009. However, the government’s approach to pushing the economy forward has been so interventionist that it has limited opportunities for the private sector and caused many foreign companies to refrain from investing in the country. To the extent that the private sector has been encouraged, the government has tried to groom national champion companies, so once again the government rather than market forces has influenced the development of the private sector. With the benefit of hindsight, it is clear that the government might have had the best of intentions but the way it has executed these policies has left a lot to be desired and is one of the reasons it has seen its base of grassroots voter support erode over the past decade. The current prime minister, Datuk Seri Najib Tun Razak, says he is trying to reverse this trend by downplaying the role of the public sector and promising to allow the private sector and market forces to play a bigger rule in the future. However, to the extent that he is changing direction, he is doing so only slowly and cautiously. The Budget for 2011, which was tabled last October and is the first one under the new 10th Malaysia Plan, calls for subsidies to be reduced, discretionary spending cut, and efforts put into making public services more efficient. The fiscal deficit is to be cut from 5.6% last year and 7% in 2009, but the projected level of the deficit of 5.4% of the GDP in 2011 would still place Malaysia more in the group of high deficit economies like India, Japan and Vietnam than more fiscally conservative ASEAN economies like Singapore, Thailand and Indonesia. Total spending is to increase 2.8% over 2010, including M$162.9 billion in operating expenditures and M$49.2 billion in development spending. Major public works include M$40 billion for a mass transit system in Kuala Lumpur and M$5 billion on a new 100-story office tower. Government revenue collection is forecast to increase 2.3% to M$165.8 billion in 2011, leaving a deficit of M$2.9 billion. The government will continue to spend heavily on subsidies in 2011. Debt-servicing costs will also rise and are expected to account for around 10% of total operating expenditure in 2011. It is likely that the recent turmoil in Egypt and Libya will prompt the Malaysian government to proceed even more slowly with fiscal consolidation. A lot will depend on how the Malaysian public reacts to the turmoil in the Middle East, but if they share in the sentiment of protesters in Middle East that governments’ economic policies have benefited too few people and that more has to be done to assist poorer segments of the population, PM Najib might increase some subsidies further and adopt other policies that are designed to appeal to poorer and middle-class voters in an election year. If this happens, there will be no appetite for fiscal consolidation and the contraction of the deficit might not materialize as planned.
PHILIPPINES Comments The Aquino government, which came to power in the middle of 2010, was quick to shift official fiscal priorities. It predecessor, the Arroyo government, focused on reducing the size of the fiscal deficit. It did a good job of this in its initial years in office, but by the end of its term it was using questionable tactics to hide how the actual size of the deficit was growing dangerously. Inheriting this mess, Mr. Aquino said he was more concerned with raising the efficiency of tax collection than with controlling the size of the fiscal deficit. The market reacted favorably to the change in emphasis, but it still means Mr. Aquino will be judged on actual results for 2011, which is the first year that fiscal policy has really been under his control instead of something he inherited from Mrs. Arroyo.
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Mr. Aquino has promised not to raise taxes, which will please business. Instead, he wants to increase tax revenue collection from existing sources so they account for at least 15% of the GDP this year, up from 13.9% last year. In his first budget, which he announced last August, the president forecast that his efforts to improve tax collection combined with conservative spending will result in a contraction of the fiscal deficit to only 2.0% of GDP by 2013 from 3.9% last year. Total government spending this fiscal year is to increase 6.8% to peso 1.645 trillion, including an 8.3% increase in current operating expenditures to peso 1.43 trillion and a 5.7% decrease in capital expenditures to peso 211.6 billion. The deficit is forecast to contract this year to peso 290 billion from peso 325 billion last year, as total revenues are forecast to increase 8.9% over last year’s planned revenues to peso 1.41 trillion. The reason the government thinks it can cut capital spending without sacrificing growth is because it is counting on Mr. Aquino’s so-called “Public-Private Partnership” (PPP) scheme to undertake major infrastructure projects. In other words, local private and foreign investors are supposed to partner with the government to drive major infrastructure projects. However, the odds are high that this will not happen at least to the extent that the government is hoping, in which case infrastructure bottlenecks will remain a major problem and growth will not reach projected levels.
SINGAPORE Comments Singapore’s new Budget has almost the exact same emphasis as Hong Kong’s, but it has not come in for any of the same criticisms that the Hong Kong Budget has attracted. This could reflect a more docile population in Singapore and a reluctance or fear to openly criticize the government that is lacking in Hong Kong. However, it could also imply that the Singapore government has done a better job than Hong Kong of convincing the public that it is not miserly in its treatment of public finances and is taking appropriate steps to help Singaporeans cope with a higher rate of inflation than usual. If the former is the case, expect opposition parties to seize upon this point and try to criticize the government in the coming election campaign, but if the latter is the case, expect the government to emphasize in the same campaign how it has spread the island’s wealth fairly and protected the population from forces that are contributing to unrest in other parts of the world. For the coming year, the government is planning to scale back its own role in driving economic growth and will try to get the private sector to lead the way. Total government spending in the new Budget covering the fiscal year that begins on April 1 is to rise by only 1.5% to S$47.1 billion. Operating expenditure is to increase 5.2% to S$35.90 billion, but government development expenditures will decline 8.7% from the year just ending to S$11.2 billion. In an attempt to get average households to spend more, all taxpayers will get a 20% personalincome-tax rebate, capped at S$2,000. In addition, the government will reduce the marginal tax rate on the first S$120,000 of taxable income. These measures are expected to put S$580 million in extra funds in the hands of the public. Other stimulus measures are aimed at getting business to invest more. The government will give a oneoff 20% rebate on corporate income tax and cash grants for small- and medium-size enterprises. The government will also exempt certain transactions from withholding tax on interest payments. Even with these incentives, the government is forecasting a 5.9% increase in operating revenue to S$48.12 billion. This would leave an overall budget surplus of just over S$1 billion compared with a deficit of S$930 million for the year just ending. Singapore has a well-deserved reputation for the conservative management of its public finances. Yet its gross-debt-to-GDP ratio was close to 100% in 2010. This contrasts with a 2010 debt-to-GDP ratio of 72% in
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India and one of 93% in the US – neither of which is known for its fiscal conservatism. Singapore’s gross debt ratio was also more than double those of South Korea and Taiwan. On a net basis, however, Singapore has no debt. Fiscally, it is just as strong as Hong Kong – which means very strong. Unlike the US and India, Singapore has exhibited persistent and large structural budget surpluses. Singapore's officially reported budget surplus averaged 4.0% GDP annually between 2001 and 2010, according to IMF figures. The apparent anomaly of, on the one hand, having high structural budget surpluses, and, on the other, a large public debt suggests that Singapore's fiscal balance sheet has substantial accumulated balances, and there is no need to issue public debt. Singapore’s public debt consists largely of Singapore Government Securities (SGS) issued to assist the Central Provident Fund (CPF), which administers Singapore's defined contribution pension fund; special issues of SGS are held by the CPF, and are non-tradeable; the government has not borrowed to finance deficit expenditures for more than 20 years.
SOUTH KOREA Comments Like other developed economies, Korea’s fiscal position deteriorated in 2008 and 2009 because of the government’s efforts to stimulate the economy in the face the global recession. Government debt also increased. However, compared with most developed economies, Korea’s fiscal situation remains strong. It is also more probusiness than populist. Revenue derived from income tax relative to the GDP is the sixth lowest among OECD countries, while the proportion of revenues derived from property and excise taxes relative to overall taxes is high. On the expenditure side, the proportion of social welfare spending relative to overall spending is low, while the portions of expenditure for the economy, housing and regional development are high compared with other developed economies. Korea’s fiscal deficit has increased but it is far from being a big burden. The fiscal balance of the central government deteriorated from 0.4% of the GDP in 2007 to -4.1% in 2009. In 2010, the balance improved to minus 2.7%. Government debt increased from 33.3% of GDP in 2007 to just over 36% last year. The government is forecasting that it will decline gradually but steadily back to 31.8% of the GDP by 2014. The trend in fiscal policy is toward greater austerity. Both revenues and expenditures are slated to increase by 8.2% in 2011 and the government plans to reduce sales of deficit treasury bonds to 22.0 trillion won from 29.3 trillion won last year. The government will boost budget spending in research and development by 8.6% to 14.9 trillion won in 2011, but it plans to cut spending on infrastructure, which was boosted to cope with the financial crisis, by 3.2% to 24.3 trillion won. The government is trying to play up the record-high 86.3 trillion won it will be spending on welfare, an increase of 5.1 trillion won from last year. Still, this is where the opposition is likely to attack the government. It thinks the government should spend more on welfare and social services, and this was the major point of disagreement when the parties debated the proposed budget in parliament last December. The most aggressive social welfare initiative of the government relates to education. In the belief that too many young Koreans are going to college and not enough to technical schools, the government has decided to pay tuition for all 480,000 students enrolled at vocational high schools. Its rationale is that the unemployment rate is high among the young generation, 82% of whom attend college, but industries have a severe shortage of workers who have had vocational training. Education expenses for this year, not including the tuition payment program for vocational schools, are 41.3 trillion won, and some 53.2 trillion won is to be distributed to regional governments. Some 14 trillion won
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is to be set aside for interest payment of sovereign bonds in 2011. Expenditure for overseas development aid programs will rise from 1.3 trillion won to 1.6 trillion won. Because of the growing threat posed by North Korea, the defense budget is to go up by 5.8% to 31.3 trillion won. A unique feature of Korea’s fiscal concerns is that the government is worried about what it would cost to fund a reunification program with North Korea. The assumption is that in the event of a collapse of the North Korean economy and political system, reunification with the South would be the most likely scenario and be a huge financial burden on the South, which Seoul should therefore start preparing for now in order to be ready. With this in mind, the government has proposed implementing a so-called “reunification” tax. We consider this reunification scenario, although a possibility, to be less likely than one that sees the North remaining independent and a close ally of Mainland China, in which case more of the post-Kim regime reconstruction costs would have to be shouldered by Beijing rather than Seoul. If so, the implication of the adoption of a “reunification” tax by the South would be to ensure that its fiscal situation remains extremely sound, giving the government a great deal of fiscal flexibility if and when the status quo in the North does change.
TAIWAN Comments Taiwan’s present fiscal situation is weaker than Asia’s other developed economies except for Japan. For the current fiscal year, the government has earmarked NT$1.79 trillion in expenditure and NT$1.63 in revenue, which amounts to a budget deficit of NT$159 billion. Together with a special budget of NT$204 billion, the combined budget gap totals NT$363 billion, which amounts to 18.21% of overall expenditure under the general budget and the special budget, and 2.62% of GDP, as forecast for 2011 by the Directorate-General of Budget, Accounting and Statistics. In order to finance the budget deficit and debt principal repayment the government will need to issue bonds worth NT$429 billion, the second highest amount ever following new borrowing of NT$493 billion in 2010. The total amount of outstanding government bonds with a maturity of more than one year rose from NT$3.720 trillion at the end of 2007 and is expected to hit NT$4.962 trillion at the end of 2011. This would amount to more than 37% of average GDP of the previous three years, close to the 40% public debt ceiling stipulated in the Public Debt Act. When that limit is reach – and it is likely to be within the next few years -- the government will have to either scale back infrastructure programs or ask the Legislative Yuan to relax the ceiling on public debt. The latter option is the one the government will likely choose. International credit rating agencies are expressing concern over the growing trend of Taiwan’s fiscal deficit, noting that the worsening finances are likely to have a negative impact on Taiwan’s local currency rating. Actually, the situation is much less critical than in most Western nations with a similar level of public sector indebtedness. Most of Taiwan’s government debt is domestic, and the government has no problems in raising the financing. Therefore, a bigger question than the economic problems from the fiscal deficit is the extent that the imbalance could be politicized. Policies that subsidize certain food and other prices to keep inflation low are popular. The public also wants to see better infrastructure, as well as social welfare, health and education services. However, where the government is vulnerable would be if the opposition can link government spending to corruption and inefficiency. This is certainly possible. The problem is that the opposition, when it held power, was guilty of the same charges and its new leaders have not been able to distance themselves from these scandals. Still, fiscal irregularities are likely to be a central part of the mudslinging that will figure prominently in the next presidential election campaign – and quite possibly have a bigger impact on public opinion than other high-profile issues like Taiwan-China relations.
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THAILAND Comments The forthcoming election is the most important factor now shaping Thailand’s fiscal policy. The government seems to have decided that only a costly battery of populist policies will ensure victory at the polls, a decision that carries more than a hint of fiscal irresponsibility. Launching its election manifesto, the Democrat Party, which leads the governing coalition, unveiled many “sweetener” policies that politicians regard as vote winners. The most prominent was a vow to lift the minimum wage by 25% within two years. There was also a promise to give education loans to one-quarter of a million students and other measures that would provide benefits for millions of Thais who are outside the social welfare system. Apart from direct fiscal risks, there is also a danger that setting policies of this nature to attract votes will force the government to abandon other measures needed to deal with inflation, public debt, big spending on infrastructure and other actions to strengthen the economy. Thus the manifesto was quickly condemned by business groups, claiming that the proposals would make much of Thai business ruinously uncompetitive. Some neutral voices accused the prime minister of trying to buy votes and that he could be violating election laws. There are also growing complaints that the government has no plan for the country beyond the election while others believe the promises themselves are no more than long-term objectives that will never be reached. The government stresses that its spending plans will quicken progress towards a more equitable society and will narrow the gap between rich and poor. The present government has hitherto been reluctant to acknowledge that this gap is at the heart of the political turmoil that Thailand has endured in recent times. Proposals to tax owners of big tracts of land would also help narrow the gap and raise new revenue but muchneeded land reform may prove to be another unreachable target. As the election approaches (it is now be expected to be held by mid-year) the government is also continuing to use subsidies to keep down the price of diesel fuel despite the climb in global oil prices. Diesel is widely used by low income earners and farmers. The oil fund that provides the subsidies will run out within weeks. There was US$700 million in the fund two months ago. The government has yet to decide whether to terminate the diesel subsidy at that time. Large sums are being used to subsidize essential foodstuffs, utility services and public transport. These arrangements for low income earners are set to continue until July and by then the election may have been decided. The question now is how long will the government use these subsidies to mask the rise of inflation. Analysts suggest that inflation would jump from just under 3% now to 4% without them. Government ministers and supporters are arguing that the country can comfortably afford this largesse and point out that tax revenues are running well above estimates and are 15% better than in the previous fiscal year. They insist that the subsidies are lowering the inflation rate, which did ease in February to 2.8% from 3.03% the previous month, and that consequently the Central Bank (CB) may not feel obliged to raise interest rates this year as much as anticipated. A rise to at least 3% by the end of the year from 2.25% now has been widely forecast. The CB has repeatedly advised that it will continue its “interest rate normalization policy” during this year in order to control inflation and maintain economic stability. The government has announced new plans to pick up an extra US$3 billion or so of revenue by the sale of the stakes that it has in scores of private companies. And there is renewed speculation about the sale of
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portions of its stakes in big state-controlled enterprises such as Thai International Airways, the airports authority and telecom agencies. This looks like an admission that fiscal issues may not be as manageable as claimed by the government. It has the problem of military spending. The demands of the generals must be met for the government to be sure of their support. The latest big ticket item is some US$2 billion for the formation and equiping of two extra army divisions that are said to be needed for the defence of the north and the northeast, areas which happen to be the power center of the government’s determined opponents, the Red Shirts. A drop is foreseen in the budget deficit this year to 350 billion baht from 420 billion baht last year. Ministers claim that the economy is on course to achieve a balanced budget by 2016. Public debt is now running at 43% of GDP, slightly less than what it was a year ago although the cost of servicing the debt is rising. Traditionally the financial authorities always respect an informal understanding that the ratio should be kept below 50% of GDP. All these estimates are based on GDP growing at not less than 4% this year and an inflation rate of about 2%. This official prediction for inflation is probably too optimistic and the government might also have seriously underestimated the level of oil prices in the year ahead.
VIETNAM Comments Vietnam is in deep trouble. Inflation is running higher than any other country in the region. Consumer prices, which have been rising by around 11% p.a., could go up by more than 15% once the full effects of the latest devaluation work their way through the system as this semester progresses. Foreign exchange reserves have fallen to precariously low levels and the balance of payments is extremely vulnerable. Inappropriate monetary policies that allowed too many state-owned companies to raise funds for questionable projects have been the main cause of the problems, but fiscal policy can be blamed too. It is difficult drawing a clear line between state-enterprise spending (and borrowing) and government spending (and borrowing). No matter whether one looks at Vietnam’s problems as being fiscal or monetary in nature, it is clear that a massive reform of the state enterprise sector is needed and government departments that are in charge of these SOEs need to cut expenditure and improve investment efficiency. The public debt in 2010 was equal to more than 50% of GDP, but this is really not the issue in Vietnam. Most of this debt was ODA (official development assistance) with a low interest rate and the long grace period. According to official reports, Vietnamese lawmakers last November approved a budget of VND86 trillion to pay back government debt this year, up 21% from VND70.25 trillion in 2010. The fund for debt settlement will account for 16.4% of the government’s total budget in 2011, making it the single biggest expenditure item this year. Other major spending items will be VND78 trillion for investment in development, VND72.2 trillion for infrastructure building, VND59.5 trillion for pension and social security payments and VND23.86 trillion for
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administration management. The government will also spend VND27 trillion to raise salaries of public servants in 2011, up 22.2% on year, the statement noted. PetroVietnam will be the only state-run company to receive state investment in 2011. It will get VND3.5 trillion to expand its oil and gas projects. However, there is so much off-balance sheet spending in Vietnam that the fiscal process is seriously lacking in transparency and the above numbers paint an incomplete picture. State-owned enterprises other than PetroVietnam are not marking time. They are raising funds through other channels (mainly state-owned banks) and using these funds not only to cover operating expenditures and invest in their core activities but also in completely unrelated activities, including real estate speculation. According to recent statements by top officials, the government is trying to raise its budget revenue, limit the state budget deficit to 5% of the GDP and cut the government’s regular expenditure by 10% this year. However, all of this skirts the issue of state-owned enterprises, the level of their debts, the returns on their investments, and who is ultimately responsible for repaying what they owe. These obligations are not ODA but obligations to the local banking system, local investors and foreign creditors. When state-owned ship building company Vinashin (which had also diversified into such industries as brewing and property development) was unable to repay its debts late last year, the government stressed that it would restructure the company but would not provide money to the company to pay its commercial debts. Not surprisingly, all major credit rating agencies have downgraded Vietnam’s sovereign rating.
EXCHANGE RATES Currency
3/04/11
Chinese renminbi
6.5675
Hong Kong dollar
7.7868
Indian rupee
44.904
Indonesia rupiah
8,787
Japanese yen
82.318
Malaysian ringgit
3.0294
Philippine peso
43.271
Singapore dollar
1.267
South Korean won
1,118
Taiwan dollar
29.3858
Thai baht
30.451
Vietnamese dong
20,835
Commercial middle rate expressed in terms of US$1.
Published by: Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queen’s Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong
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