NEW YORK CITY: Social distancing has become the primary tool for protecting public health amid the coronavirus pandemic, and its inevitable impact on economic life has required governments to provide income and support to those who can no longer work, even as spending on public health rises.
Nearly all governments globally are now running large fiscal deficits, and a sharp rise in the stock of public debt globally is expected.
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Asian countries, though, are well-suited to handle this increase in public debt – with some exceptions.
LISTEN: Singapore enters Phase 2 – what's behind rules on gatherings, dining, weddings and more?
READ: Commentary: The biggest restructuring exercise facing Singapore businesses has just begun
FISCAL SURPLUSES OF TAIWAN AND SOUTH KOREA
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Economies like Taiwan and South Korea have it relatively easy. Taiwan was running a 10.5 per cent of GDP current account surplus before the virus, using its high level of savings to invest around the world. Its life insurers in particular were big buyers of risky global bonds.
Thanks to an effective public health response, Taiwan appears likely to avoid the kind of economic shock experienced by Europe and the United States.
But there is no doubt that it can accommodate large fiscal deficits. In fact, more Taiwanese bond issuance would help Taiwans insurers, who are being forced abroad by the lack of domestic supply.
READ: Commentary: With command and control, Taiwan excels in managing COVID-19
South Korea is broadly in the same position. The country stood apart from the rest of the G20 by maintaining (unneeded) fiscal surpluses after the global financial crisis, instead relying on a weak won and exports for growth. As recently as 2018, South Korea ran a fiscal surplus of close to 2 per cent of GDP.
As a result, the nation can also reduce its overall risk profile by issuing domestic bonds to its National Retirement System and its life insurers. Financing domestic fiscal deficits is less risky than searching for yield in the US corporate bond market.
JAPAN AND CHINA AS GLOBAL CREDITORS
Japan fits alongside these countries as well.
Japan has long been able to borrow at zero – almost eliminating the real burden of its admittedly large stock debt. Japans domestic debt stock gets too much attention, while its role as a global creditor gets too little.
READ: Commentary: Japan sure is smug about beating COVID-19
A man wearing a protective mask stands in front of the headquarters of Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon
Japans government, counting the Government Pension Investment Fund, has more external foreign currency assets than it does external foreign currency liabilities. It too can reduce its national risk profile by substituting Japanese government bonds for international assets on its national balance sheet.
China also faces no immediate financial difficulties. This surprises some, as an enormous amount of attention has been paid to the rise in Chinas domestic debt after 2008.
But that debt isnt actually central government debt – China chose to carry out its 2009 stimulus through local government investment vehicles, state enterprises funded by state banks and its shadow financial system.
The Chinese Ministry of Finances bonded debt is actually very low – around 20 per cent of Chinas GDP. In fact, increasing stimulus at the central government level and relying less on local government investment vehicles could help reduce some of the risks building inside Chinas financial system.
READ: Commentary: Embattled China knows its national priority is the economy
READ: Commentary: Chinas removal of GDP targets reveals its new economic strategy
In the past, too much stimulus was undertaken by entities borrowing on the strength of implicit guarantees. Relying on the central government would also allow China to use the strength of the Ministry of Finances balance sheet to finance a major expansion of spending on public health and a much-expanded system of social insurance.
What gets lost in the discussion of Chinas domestic debt is that Chinas massive borrowing and investment binge was financed entirely internally.
China never ran a current account deficit and is steadily building up external assets. China remains, globally speaking, a creditor, not a debtor.
In fact, the greatest risk is that China doesnt do enough stimulus because of misguided concerns about its internal debt load and a persistent unwillingness to use the Ministry of Finances clean balance sheet to fund domestic stimulus, instead relying on exports to drive its recovery.
THE ONLY CONCERN
Only one of the major economies in East Asia poses a real concern – Indonesia. Indonesias public debt-to-GDP ratio is modest, at a third of GDP. But with a low savings rate and a small domestic tax base, Indonesia has been borrowing externally.
A man walks past an electronics shop in South Jakarta as the store gets ready to open on June 5, 2020. (Photo: Nivell Rayda)
Indonesias government entered 2020 with around US$200 billion in external debt, including the roughly US$80 billion in rupiah-denominated bonds held abroad.
Unlike most other Asian economies, Indonesia has never held significant foreign exchange reserves. Thus it screens as vulnerable.
Read More – Source
NEW YORK CITY: Social distancing has become the primary tool for protecting public health amid the coronavirus pandemic, and its inevitable impact on economic life has required governments to provide income and support to those who can no longer work, even as spending on public health rises.
Nearly all governments globally are now running large fiscal deficits, and a sharp rise in the stock of public debt globally is expected.
Advertisement
Advertisement
Asian countries, though, are well-suited to handle this increase in public debt – with some exceptions.
LISTEN: Singapore enters Phase 2 – what's behind rules on gatherings, dining, weddings and more?
READ: Commentary: The biggest restructuring exercise facing Singapore businesses has just begun
FISCAL SURPLUSES OF TAIWAN AND SOUTH KOREA
Advertisement
Advertisement
Economies like Taiwan and South Korea have it relatively easy. Taiwan was running a 10.5 per cent of GDP current account surplus before the virus, using its high level of savings to invest around the world. Its life insurers in particular were big buyers of risky global bonds.
Thanks to an effective public health response, Taiwan appears likely to avoid the kind of economic shock experienced by Europe and the United States.
But there is no doubt that it can accommodate large fiscal deficits. In fact, more Taiwanese bond issuance would help Taiwans insurers, who are being forced abroad by the lack of domestic supply.
READ: Commentary: With command and control, Taiwan excels in managing COVID-19
South Korea is broadly in the same position. The country stood apart from the rest of the G20 by maintaining (unneeded) fiscal surpluses after the global financial crisis, instead relying on a weak won and exports for growth. As recently as 2018, South Korea ran a fiscal surplus of close to 2 per cent of GDP.
As a result, the nation can also reduce its overall risk profile by issuing domestic bonds to its National Retirement System and its life insurers. Financing domestic fiscal deficits is less risky than searching for yield in the US corporate bond market.
JAPAN AND CHINA AS GLOBAL CREDITORS
Japan fits alongside these countries as well.
Japan has long been able to borrow at zero – almost eliminating the real burden of its admittedly large stock debt. Japans domestic debt stock gets too much attention, while its role as a global creditor gets too little.
READ: Commentary: Japan sure is smug about beating COVID-19
A man wearing a protective mask stands in front of the headquarters of Bank of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon
Japans government, counting the Government Pension Investment Fund, has more external foreign currency assets than it does external foreign currency liabilities. It too can reduce its national risk profile by substituting Japanese government bonds for international assets on its national balance sheet.
China also faces no immediate financial difficulties. This surprises some, as an enormous amount of attention has been paid to the rise in Chinas domestic debt after 2008.
But that debt isnt actually central government debt – China chose to carry out its 2009 stimulus through local government investment vehicles, state enterprises funded by state banks and its shadow financial system.
The Chinese Ministry of Finances bonded debt is actually very low – around 20 per cent of Chinas GDP. In fact, increasing stimulus at the central government level and relying less on local government investment vehicles could help reduce some of the risks building inside Chinas financial system.
READ: Commentary: Embattled China knows its national priority is the economy
READ: Commentary: Chinas removal of GDP targets reveals its new economic strategy
In the past, too much stimulus was undertaken by entities borrowing on the strength of implicit guarantees. Relying on the central government would also allow China to use the strength of the Ministry of Finances balance sheet to finance a major expansion of spending on public health and a much-expanded system of social insurance.
What gets lost in the discussion of Chinas domestic debt is that Chinas massive borrowing and investment binge was financed entirely internally.
China never ran a current account deficit and is steadily building up external assets. China remains, globally speaking, a creditor, not a debtor.
In fact, the greatest risk is that China doesnt do enough stimulus because of misguided concerns about its internal debt load and a persistent unwillingness to use the Ministry of Finances clean balance sheet to fund domestic stimulus, instead relying on exports to drive its recovery.
THE ONLY CONCERN
Only one of the major economies in East Asia poses a real concern – Indonesia. Indonesias public debt-to-GDP ratio is modest, at a third of GDP. But with a low savings rate and a small domestic tax base, Indonesia has been borrowing externally.
A man walks past an electronics shop in South Jakarta as the store gets ready to open on June 5, 2020. (Photo: Nivell Rayda)
Indonesias government entered 2020 with around US$200 billion in external debt, including the roughly US$80 billion in rupiah-denominated bonds held abroad.
Unlike most other Asian economies, Indonesia has never held significant foreign exchange reserves. Thus it screens as vulnerable.
Read More – Source
