SINGAPORE, June 14 – Fears about Asian countries’ fiscal health are mounting as the economic downturn hits tax revenues while public spending is rising sharply.
On June 9, Standard & Poor’s, an international ratings agency, warned of possible downgrades to its sovereign-debt ratings for a number of Asian economies.
Certainly, the region continues to suffer the economic ill-effects of the global recession. This is reflected in the Economist Intelligence Unit’s own sovereign ratings for Asia and Australasia, and in our forecasts of a sharp deterioration in budget deficits this year.
Since August 2007, when the global credit crisis was in its early stages, we have lowered our sovereign ratings for 13 of the 20 Asian and Australasian countries covered by our Country Risk Model.
These ratings quantify the risk of a government building up arrears on the principal or interest of its foreign-currency or domestic debt.
Most recently, in April we lowered our sovereign rating for Vietnam from B to CCC, in March we downgraded South Korea from BBB to BB, and in February we cut our rating for Taiwan from A to BBB.
In light of the fiscal pressures arising from the global recession, and from the policy response to it, international ratings agencies are also reassessing the creditworthiness of Asian governments.
Downgrades could affect the cost and availability of credit to governments in the region.
Our fiscal projections for Asia and Australasia underline both the challenges governments in the region face and the scale of the policy response.
China’s fiscal stimulus package is probably the most famous because of its absolute size, at Rmb4 trillion (US$585 billion), but numerous other countries are planning ambitious fiscal programmes.
They include Australia, Singapore and South Korea. This will result in dramatic increases in public spending. According to our projections, government spending in South Korea will rise by 21 per cent in nominal terms in 2009 compared with 2008.
Elsewhere in the region, budget spending will rise by 20 per cent in China, by 11 per cent in Singapore and India, and by 10 per cent in Malaysia and Australia.
Predictably, when combined with falling tax receipts as a result of weak economic activity, this will result in sharply higher budget deficits.
For Asia and Australasia (excluding Japan) as a whole, we expect the aggregate deficit to widen to 4.6 per cent of GDP in 2009, compared with a surplus of 0.4 per cent of GDP in 2007.
The most spectacular deterioration in fiscal accounts, in percentage points, during this period will occur in Hong Kong. We forecast that the territory, which is very exposed to the global economy, will post a budget deficit of 4.1 per cent of GDP this year, representing a drop of 11.8 percentage points from the surplus of 7.7 per cent of GDP in 2007 when the economy was still booming.
The other countries with the steepest forecast declines in budget balance are New Zealand (down 10.5 percentage points), South Korea (down 9.2 points) and Singapore
(down 7.4 points).
The fiscal outlook will brighten in 2010, however, as the global economy begins to recover. Out of 20 economies in Asia and Australasia (ex Japan), we expect that 14 will see an improvement in their budget position next year.
However, most deficits will still be quite large – at around 3.7 per cent of GDP on aggregate – and it will take a couple of years for deficits to shrink to healthier levels. Only in 2012 do we expect the aggregate deficit to fall to 2 per cent of GDP.
The challenge for governments in the region will be to re-establish their fiscal credibility quickly once economic recovery takes hold. Large deficits are widely seen as completely acceptable as a temporary response to an unprecedented global economic crisis, but once economies begin to emerge from the downturn, markets will expect governments in Asia – as elsewhere – to put their houses in order.
As some governments in the region are probably hoping that the rising tide of economic growth will, on its own, restore their fiscal accounts to health, there is a risk that policy discipline will be lacking. Were this to occur, sovereign ratings would come under further pressure.
Indeed, our projections show that the forecast improvement in fiscal positions by 2012 will be uneven.
India, which has perennial troubles with fiscal discipline, will still have a budget deficit of 4.8 per cent of GDP in 2012.
Elsewhere, Malaysia will have a budget gap equivalent to a stunning 7.4 per cent of GDP, while Sri Lanka, Vietnam and Bangladesh will all have deficits of more than 5 per cent of GDP.
In contrast, the more developed economies of Hong Kong, Singapore and South Korea will return much more rapidly towards fiscal balance. – Economist Intelligence Unit
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