Asia Makes Fiscal Push After Rate Cuts to Limit Trade War Damage
Asian governments are trickling out fiscal stimulus amid a deepening exports slump, bolstering central bank efforts to shore up their economies as the global mood darkens.
From South Korea to Thailand, authorities have this month either allocated or pledged extra spending and cut taxes to offset the damage the U.S.-China trade war is inflicting on the world’s manufacturing region. With relatively low public debt compared to peers globally, governments in South Korea and Indonesia are targeting record spending next year, while in Hong Kong, a raft of stimulus measures have been announced to prevent the economy tipping into recession.
Yet the room to maneuver is mixed. While countries like China and Singapore have space to spend more, others, like Indonesia and India, are constrained by fiscal and current account deficits. In any case, rolling out effective fiscal policy isn’t easy given bureaucratic lags and the risk of choosing inefficient programs.
“After watching the fiscal stimulus response over the last two decades, what you learn is that it’s often the right move, but it’s slow,” said Chua Hak Bin, an economist at Maybank Kim Eng Research Pte. in Singapore. “For the most part, it often falls short of the plans.”
The fiscal push comes as central banks run up against policy limits in their rush to cut interest rates. With borrowing costs already low in most places, central bankers like Bank of Korea’s Governor Lee Ju-yeol are calling for fiscal levers to be deployed as well.
“Fiscal policy needs to step up as scope for aggressive monetary easing is limited if global demand deteriorates markedly,” said Katrina Ell, an economist with Moody’s Analytics in Sydney.
Yet even concerted fiscal and monetary stimulus may not be enough to offset the drag of uncertainty caused by the deepening U.S.-China trade war.
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“Fiscal stimulus, where it is an available option, won’t be much of a cushion to counter trade war effects. Within Southeast Asia, for example, net exports amount to about a quarter of Singapore’s economy and about 9% for Thailand. What’s more, damage is not contained to exports. Another casualty is investment, which accounts for about 25% of growth.”
--Tamara Mast Henderson, Asean economist
With the exception of Japan, governments in Asia typically have smaller fiscal deficits and debt loads relative to their advanced-economy peers. That leaves them better positioned to respond with additional government spending when growth is slowing, said Tuuli McCully, head of Asia-Pacific economics at Scotiabank in Singapore.
“That allows most of them to stimulate the economy much more than, let’s say, Europe,” she said.
China is rolling out around 2 trillion yuan ($280 billion) in tax cuts, and has room to spend more after loosening its deficit targets for 2019, though the government is grappling with a rapid buildup in corporate debt.
Measures taken by Beijing so far show “that it’s much harder to use government spending to stabilize growth, let alone to stage a recovery on the strength of fiscal spending,” said Chang Shu, chief Asia economist at Bloomberg Economics.
Slower growth means weaker tax revenues, and for economies like India, which is targeting a fiscal deficit of 3.3% of GDP for this year, authorities are being forced to look for additional funding sources. The central bank agreed on Monday to transfer a record 1.76 trillion rupees ($24.4 billion) to the government to help spur the economy.
While Japan has the world’s largest government debt pile among developed nations, it’s tipped to step up spending as a planned sales tax hike in October risks hurting consumption. Prime Minister Shinzo Abe has said he won’t hesitate to take agile measures if needed and Finance Minister Taro Aso has signaled a readiness for more spending.
In Southeast Asia, Indonesia has pledged record spending for its 2020 budget and is readying emergency measures if global conditions worsen. Thailand has approved more than $10 billion in government outlays and loans. Singapore’s officials have said they stand ready to provide fiscal aid if conditions worsen.
Memories of the Asian financial crisis of the late 1990s have spurred authorities to build up hefty foreign reserves to protect their economies. The trillions they’ve saved, along with generally smaller external deficits, put them in a better position than prior crisis periods to handle the headwinds, said Scotiabank’s McCully.
Like elsewhere, central banks alone won’t be able to revive the region’s growth.
“With the risks to growth likely still tilted to the downside, the evolving expectation is that all policy levers, not just monetary but also fiscal, will be actively and more aggressively utilized,” Sin Beng Ong, an analyst at JPMorgan Chase & Co. in Singapore, wrote Monday in a research note.
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