ECONOMICS: IMF and fiscal stimulus
Far Eastern Economic Review
Oct 29, 1998
Rev Up Spending:
IMF's about-turn on fiscal stimulus won't work
By Salil Tripathi in Singapore
It is a policy reversal that the International Monetary Fund has begun
to push aggressively. Throwing off its customary austerity, the IMF
wants Thailand, South Korea and Indonesia to rev up their fiscal engines
and spend their way out of the economic blues. And if they rack up
budget deficits in the process, that's okay, too.
The IMF set budget deficits in September at 3% of GDP for Thailand,
4% for South Korea and 8.5% for Indonesia, revised since the Fund
announced its policy about-turn in July. But economists say the size of
these deficits won't be sufficient for badly needed bank capitalization
and social safety-nets. What's more, governments are loath to fall too
far into the red, anyway.
As many experts see it, this impetus isn't strong enough. "At such
time Asia needs a massive fiscal stimulus, and that's not coming
through," notes Manu Bhaskaran, chief strategist at SG Securities in
Singapore. P.K. Basu, chief economist at Credit Suisse First Boston in
Singapore, concurs. Using Thailand as an example, he notes that the
country's budget deficit of about 200 billion baht ($5 billion) forecast
for 1998 is "too little," given that its current-account surplus is
expected to be 418 billion baht. He points out that Thailand's GDP is
targeted to shrink 8.3%. Because deficit financing is measured as a
percentage of GDP, in absolute terms, Thailand's public spending would
be less in 1998 than it was in 1997. "If that isn't tight money policy,
what is?" muses Basu.
Indeed, some economists believe the fiscal stimulus won't work unless
governments use their rising foreign-exchange reserves to increase
domestic spending. Exporters sell the hard-currency earnings they bring
into the country to the central bank via commercial banks. To pay for
the hard currency, the central bank either prints new money on the
strength of the increase in its reserves, or reduces the
capital-adequacy ratios of the commercial bank concerned. This creates
new liquidity in the system -- a monetary expansion that the IMF would
readily approve. The main worry is that the commercial banks might use
the new liquidity to boost their reserves rather than lend it out, thus
weakening the fiscal-stimulus initiative. "There is an air of irrational
exuberance in the IMF's thinking," says a regional economist with a
European brokerage in Singapore.
The severity of Asia's economic illness prompted the IMF's monetary
rethink. Circumstances have changed since the IMF first urged tight
monetary policies on Asia's sick. The early days required austerity to
help economies to stabilize. "That period is behind us. Now is the time
to expand," says IMF Asia-Pacific Director Hubert Neiss, reiterating an
argument that the IMF has been making for the past three months. Indeed,
the region is beginning to perk up: Currencies are no longer bouncing
like yo-yos; interest rates -- although still high -- have fallen; and
foreign reserves have grown since the lows of 1997.
Neiss believes a fiscal stimulus -- handled properly -- will help
liquidity to flow back into Asia. He says confidence in the region would
return by early 1999, thus attracting private money, if global
conditions are favourable. This in turn will help governments to pay for
bank recapitalization, easing the burden of corporate debt.
But the IMF's target economies aren't completely convinced. "In other
countries, we have to urge governments not to run budget deficits; in
Asia, we have to encourage them to expand fiscally. But Asians don't
like running large deficits," said Stanley Fischer, the IMF's
Washington-based deputy managing director.
Indeed, Indonesia and South Korea have dragged their feet in
stimulating demand because they are accustomed to running budget
surpluses; in the past, multilateral agencies, including the IMF, have
praised them for this. And Thailand has resisted a larger budget
deficit, says an IMF official in Bangkok, despite "a blank cheque" that
the fund is willing to write for social spending.
In fact, Asian governments had wanted to steer clear of budget
deficits altogether, hoping that export earnings would bounce back and
foreign capital would return. Neither has happened, admits Miranda
Goeltom, a director at Bank Indonesia, the country's central bank.
Exports haven't risen in dollar terms in Thailand, South Korea and
Indonesia, for example, as global overcapacity has depressed prices in
the key Asian manufacturing industries such as electronic goods. Nor is
it likely that the volume of exports will pick up; the pace of world
economic growth is forecast to slow to 2% in 1998 from 4.1% in 1997.
Foreign capital, too, remains skittish. David Hale, chief global
economist at the Zurich group in Chicago, doesn't think it will return
anytime soon to Asia -- or to any emerging market, for that matter.
But the IMF's fiscal-stimulus plan perhaps offers too little, too
late. If governments will spend less in absolute terms in 1998 than they
did in previous years, the outlay for bank recapitalization or social
safety-nets simply won't be enough. According to estimates by the Asian
Development Bank early this year, social-safety schemes would cost 7% of
GDP in Indonesia, and about 5% of GDP in Thailand.
Calculating the cost of bank recapitalization is trickier, but Asian
bankers say it could range from 25% to 50% of GDP in each of the three
countries. Depending upon exchange rates used, that could amount to
between $75 billion and $150 billion. But current-account surpluses for
the trio are expected to collectively total just $57 billion, says SG
Securities in Singapore.
There are few financing options available, however. The World Bank
and the ADB can provide only a fraction of the needed funds. Tapping
Asia's private savings would be difficult. Few Asian countries have
active markets for bonds, or other fiscal instruments, in which to pour
savings. Depending upon the limited fiscal stimulus would be like
depending upon a freak shower to reinvigorate a parched landscape.