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Can Asian countries splurge their way out of a slowdown?

Can Asian countries splurge their way out of a slowdown?
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First Published: Tue, Mar 11 2008. 01 00 AM IST
Updated: Tue, Mar 11 2008. 01 00 AM IST
Singapore: Asian governments are abandoning spending restraint and trying to get their consumers to do the same in their battle to overcome slowing growth.
The Philippines may discard plans to balance its budget this year as President Gloria Arroyo’s government accelerates investment in public works and social services. Thailand’s government is spending 1.5 trillion baht (Rs1.9 trillion) to expand mass transportation and improve health care. Hong Kong is cutting taxes, and Singapore is handing out cash to its citizens.
Such policies, aimed at generating more demand at home to make up for slowing overseas sales, come with the encouragement of the International Monetary Fund (IMF), in a reversal of its long-standing push for fiscal restraint. Developing more self-sustaining domestic sources of growth may help Asia’s emerging economies shift away from dependence on exports.
“There’s been a long tradition of fiscal frugality in most Asian countries,” said Hubert Neiss, IMF’s top official for the region during the 1997-98 financial crisis. “However, at a time when global demand and exports are slowing down, it’s important to boost domestic demand, consumption and investment. Asia can afford it.”
In developing Asian nations, IMF predicts growth will decline to 8.6% in 2008 from an estimated 9.6% in each of the past two years.
Dragged down
The region’s economies, almost twice as reliant on overseas sales as the rest of the world, are being dragged down by weakness in the US, Japan and Europe, the markets for 60% of Asian shipments. Purchasing managers’ indexes in China, Singapore and India already indicate slowing manufacturing growth.
The slowdown has been accompanied by accelerating inflation that limits the ability of Asian central banks to support growth with lower interest rates. In January, IMF managing director Dominique Strauss-Kahn urged governments to tackle the problem by easing tax and spending policies. That reversed the lender’s traditional guidance in favour of smaller budget deficits.
“If you’re concerned about inflation, then perhaps one way is to hold monetary policy fairly tight and target fiscal stimulus,” said Bill Belchere, an economist at Macquarie Securities Ltd in Hong Kong. “Asia is listening.”
Ample resources
Some Asian countries have ample resources to employ fiscal measures as the region’s expansion has enriched their treasuries in the aftermath of the 1997-98 financial crisis.
A decade ago, Asia was reeling after currencies including the Thai baht and the Indonesian rupiah plummeted in value, leading to a wave of devaluations, bankruptcies and a flight of foreign capital. Support packages from IMF came with conditions that forced countries to curb spending, prolonging their pain as they fell into recessions.
Now, with property markets in Hong Kong booming, its government projects a record budget surplus of HK$115.6 billion (Rs60,230 crore) for the fiscal year ending 31 March.
In India, tax collections have more than doubled since Prime Minister Manmohan Singh’s government came to power in 2004. The government proposes sharing the wealth by waiving Rs60,000 crore in agricultural loans for as many as 40 million farmers. Finance minister Palaniappan Chidambaram also raised the income-tax exemption limit and cut excise duties on goods including drugs and small cars.
Tax breaks
Hong Kong financial secretary John Tsang said last month the government will spend HK$33.9 billion to provide personal, corporate and real estate tax breaks, subsidize electricity bills and abolish duties on wine and beer. Singapore plans to distribute S$2.8 billion in cash and tax rebates.
Even China, whose growth reached a 13-year high in 2007, needs to increase domestic spending, said Neiss, now a senior Asia adviser for Deutsche Bank AG in Vienna.
China’s Premier Wen Jiabao said on 5 March that the government will raise welfare payments to provide a shield from soaring food costs. China also plans to spend 31% more on agriculture in 2008, boosting rural incomes that are a third of those in the cities.
“Should exports seriously slow down in China, there’s a good argument to change the pattern of demand from exports to domestic consumption,” Neiss said. “It will benefit the standards of living of the people and make their economy more resistant to adverse global influences.”
Unused highways
Pumping government cash into an economy to raise growth isn’t risk-free. In the 1990s, the Japanese government’s attempt to spend its way out of a recession left the nation with the world’s biggest public debt and miles of little-used roads and bridges.
Asian officials willing to take that chance have some company elsewhere. In the US, President George W. Bush has approved a stimulus package including tax rebates worth $168 billion (Rs6.8 trillion). UK’s chancellor of the exchequer Alistair Darling said last month that fiscal policy will be aimed at stimulating growth rather than reducing the government’s deficit. Both of Spain’s main parties have pledged fiscal-stimulus packages.
Limited options
Options are limited in the 15 nations that share the euro by a requirement that they hold their budget deficits below 3% of gross domestic product (GDP). The same constraints apply to the 10 new European Union (EU) members, most in eastern Europe, for them to qualify to convert to the euro.
France is already forecast to run the largest deficit in the euro area next year, and weaker expansion may make it the first nation to test EU budget rules since they were revised in 2005. European finance ministers on 12 February pressed France to hold to a promise to balance its budget by 2010.
“Asian governments are willing to stretch their budgets a bit more to lean against the headwinds because they have the money and the ability to spend,” said Joseph Tan, an Asia strategist at Fortis Bank SA in Singapore. “In Europe, they need to maintain fiscal adherence to keep the entire monetary system in order.”
Not all Asian nations can afford to boost their economies using tax and spending tools. Countries such as Sri Lanka and Malaysia “have fiscal vulnerabilities right now,” said Ping Chew, a managing director at Standard and Poor’s in Singapore.
“If they try to do too much, to have the economy living off and dependent on the government, they run the risk” of hurting credit standings they rebuilt after the currency crisis a decade ago.
“Asia has to be careful that the measures it’s taking reflect the temporary phenomenon of slowing growth it’s experiencing and that the fiscal stimulus doesn’t become entrenched,” Chew said.
Simon Kennedy in Paris, Jens Gould in Mexico City and Sebastian Boyd in Santiago contributed to this story.
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First Published: Tue, Mar 11 2008. 01 00 AM IST