Asian economies are likely to resort to expansionary fiscal policies to drive growth in their countries due to persistent constraints on monetary easing, says Priyanka Kishore, Lead Asia Economist at Oxford Economics in a Monday report.
Among the economies, China is likely to provide the most significant fiscal boost while the notable exceptions will be India and Australia, says Kishore.
Although the whole of Asia appears well placed to sustain expansionary fiscal policies, the degree of intervention will depend on three main factors. They are the availability of fiscal space, the sustainability of fiscal space, as well as binding constraints from fiscal rules and institutional framework.
Singapore and Hong Kong are best positioned to provide further fiscal support given their budget surpluses and lack of public debt. For 2016, Kishore expects Singapore to achieve a balanced budget while Hong Kong’s surplus is expected to fall to 0.5% of GDP. Thus, the research house does not expect expansionary fiscal policy to be implemented.
Australia has the most fiscal space to implement fiscal policy of an expansionary nature as its interest rate and growth differential is expected to turn substantially negative in the coming years. However, the current administration, like its predecessors, is committed to achieve a medium-term budget surplus. As such, the use of expansionary fiscal policy is likely to be muted.
Japan is likely to employ fiscal measures despite having the lowest fiscal space available among the Asian economies due to its high public debt-to-tax revenue ratio. Despite this constraint, the absence of binding fiscal rules and an inability to further lower interest rate means that the Japanese government is likely to resort to fiscal policy as a driver of growth.
China is expected to record a fiscal deficit of 5% of GDP in 2016, according to the report. This is despite having a public debt-to-GDP ratio exceeding 50%. Kishore believes that China’s public debt dynamics will improve marginally in 2016-2017.
Thailand has budgeted an additional 20% in public investment given its considerable fiscal
space and improving debt-to-GDP ratio. However, the analyst warns that fiscal measures will be contingent on prevailing political conditions remaining calm.
Indonesia is expected to exercise prudence in using fiscal policy to drive growth as it strives to keep its annual budget within 3% of GDP against the backdrop of rising yields that have risen from around 5% at the beginning of 2013 to 7.5% as at June 2016. This has adversely affected Indonesia’s ability to use fiscal measures as an effective tool.
India has experienced rapid nominal growth over the past few years, which has helped to limit the increase in debt ratio despite persistently sizable fiscal debts. It has in recent times favoured short-term populist spending instead of exercising fiscal prudency. However, Kishore believes fiscal deficit is finally being reined in as rating agencies increasingly scrutinise India’s debt levels. Debt-to-GDP ratio is expected to improve in the year ahead but the pace of fiscal consolidation is expected to be slower than budgeted for.
Malaysia is expected to undertake fiscal consolidation efforts to protect its credit ratings as public debt is closing in on the statutory debt ceiling. Interest rate-growth gap is expected to narrow substantially over 2016-2018.
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Among the economies, China is likely to provide the most significant fiscal boost while the notable exceptions will be India and Australia, says Kishore.
Although the whole of Asia appears well placed to sustain expansionary fiscal policies, the degree of intervention will depend on three main factors. They are the availability of fiscal space, the sustainability of fiscal space, as well as binding constraints from fiscal rules and institutional framework.
Singapore and Hong Kong are best positioned to provide further fiscal support given their budget surpluses and lack of public debt. For 2016, Kishore expects Singapore to achieve a balanced budget while Hong Kong’s surplus is expected to fall to 0.5% of GDP. Thus, the research house does not expect expansionary fiscal policy to be implemented.
Australia has the most fiscal space to implement fiscal policy of an expansionary nature as its interest rate and growth differential is expected to turn substantially negative in the coming years. However, the current administration, like its predecessors, is committed to achieve a medium-term budget surplus. As such, the use of expansionary fiscal policy is likely to be muted.
Japan is likely to employ fiscal measures despite having the lowest fiscal space available among the Asian economies due to its high public debt-to-tax revenue ratio. Despite this constraint, the absence of binding fiscal rules and an inability to further lower interest rate means that the Japanese government is likely to resort to fiscal policy as a driver of growth.
China is expected to record a fiscal deficit of 5% of GDP in 2016, according to the report. This is despite having a public debt-to-GDP ratio exceeding 50%. Kishore believes that China’s public debt dynamics will improve marginally in 2016-2017.
Thailand has budgeted an additional 20% in public investment given its considerable fiscal
space and improving debt-to-GDP ratio. However, the analyst warns that fiscal measures will be contingent on prevailing political conditions remaining calm.
Indonesia is expected to exercise prudence in using fiscal policy to drive growth as it strives to keep its annual budget within 3% of GDP against the backdrop of rising yields that have risen from around 5% at the beginning of 2013 to 7.5% as at June 2016. This has adversely affected Indonesia’s ability to use fiscal measures as an effective tool.
India has experienced rapid nominal growth over the past few years, which has helped to limit the increase in debt ratio despite persistently sizable fiscal debts. It has in recent times favoured short-term populist spending instead of exercising fiscal prudency. However, Kishore believes fiscal deficit is finally being reined in as rating agencies increasingly scrutinise India’s debt levels. Debt-to-GDP ratio is expected to improve in the year ahead but the pace of fiscal consolidation is expected to be slower than budgeted for.
Malaysia is expected to undertake fiscal consolidation efforts to protect its credit ratings as public debt is closing in on the statutory debt ceiling. Interest rate-growth gap is expected to narrow substantially over 2016-2018.
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