Region opens fiscal taps, but borrowing could spell trouble in next slowdown
SINGAPORE — Government debt in emerging Asian economies hit 50% of gross domestic product in the third quarter of last year, according to estimates by the Institute of International Finance, in a trend that suggests a regional shift away from fiscal conservatism.
Further increases in public debt, however, point to potential problems if the global economy takes a sudden turn for the worse. The next two years could be precarious, with some economists predicting slower growth.
“Entering a financial crisis with a weak fiscal position worsens the depth and duration of the ensuing recession, particularly in emerging-market economies, because fiscal policy tends to be pro-cyclical in these cases,” said Vitor Gaspar, director of the International Monetary Fund’s Fiscal Affairs Department.
While government debt in emerging Asia is creeping up, it remains low compared with Japan’s 223.1% of GDP and 100.8% in the U.S.
“The relatively low public debt gives the region more buffer against a potential global downturn, enabling policymakers to use expansionary fiscal policy to support demand,” said Frederic Neumann, co-head of Asian economic research at HSBC. “In China, for example, the central government is increasingly stepping up its fiscal easing, with selected tax cuts for households and companies, something it can afford given the relatively low level of public debt.”
“The small increase reflects consolidation by the public sector, as well as a shift in demand to the private sector, in countries such as China, [South] Korea, Indonesia, Malaysia, Thailand and the Philippines,” said Hoe Ee Khor, chief economist at the Singapore-based ASEAN+3 Macroeconomic Research Office.
“The East Asian region has typically been prudent when it comes to the management of public finances,” Hoe said. “As [with] any form of debt, high levels beyond sustainable thresholds could create vulnerabilities, and regional policymakers appear mindful of the risks.”
Asia’s mix of relatively low public debt and relatively high private debt is part of a larger picture of spiralling borrowing worldwide. Global debt reached $244 trillion in the third quarter of last year, according to the IIF. Non-financial corporate debt in emerging Asia jumped five percentage points, year-on-year, to 124% of GDP, compared with 101.6% in Japan and 72.6% in the U.S.
According to IMF estimates, 40% of the overall rise in debt worldwide over the last decade came from China. Arguably the biggest cause for concern is the growth of corporate debt outside the financial sector in the country, which the IIF estimates hit 157% of GDP in the third quarter.
Professor Xiang Songzuo, former chief economist at China Agriculture Bank, said in a Dec. 15 speech that “to solve the debt problem, first, the government has to pay back debts it owes businesses, the state-owned enterprises have to pay back debts they owe private enterprises and large private enterprises have to pay back debts they owe smaller ones.”
Concerns about China’s rising debt levels are mirrored by worries elsewhere in Asia. Though most Asian government debt levels are relatively low, those of Hong Kong, India, Pakistan and Singapore run between 67% and 112% [of GDP], potentially tightening policymakers’ economic wriggle room, come any regional or global downturn, and highlighting the region’s “striking[ly] divergent patterns,” said Chua Hak Bin, senior economist at Maybank Kim Eng.
Rising public debt in Malaysia prompted Prime Minister Mahathir Mohamad to put the brakes on Chinese-backed port and rail projects, while elsewhere concerns have been raised about a “debt trap” stemming from loans taken under Beijing’s Belt and Road Initiative, a big infrastructure development project.
Sri Lanka handed control of the Chinese-funded Hambantota port to Beijing after it was unable tor repay debts incurred in its construction, while Pakistan was forced in October last year to approach the IMF for a bailout, in part due to debts taken on under the initiative.
Asia’s mix of relatively low public versus relatively high private debt comes as overall world debt is spiralling. The IIF’s scarcely-believable $244 trillion global debt total revised upwards the International Monetary Fund’s December estimate of an “all-time high” of $184 trillion for 2017.
“On average, the world’s debt now exceeds $86,000 per person..the top three borrowers in the world (United States, China, and Japan) account for more than half of global debt, exceeding their share of global output,” the IMF reported.
In an October, the IMF suggested governments come up with a more transparent “balance sheet” analysis, not only including typically off-book public corporation debt and clearing up sometimes hazy public-private lines, but on the other hand factoring in “public assets” — such state corporations, infrastructure, natural resources — which the fund estimated to be worth $101 trillion, or 219% of world GDP.
But earlier in 2018 the IMF warned in a research paper that “excess private debt tends to spill over into the public-sector balance sheet,” citing not only controversial bank bailouts dispensed during the 2008 global economic crisis but less-contentious measures taken by governments “whenever the private sector is caught in a debt overhang.” Other analyses suggest that there is no way to objectively measure when government debt becomes dangerous, as debt sometimes is an indicator of spending that in turn drives the growth that later helps reduce debt and lower interest on debt repayment.Show