Essay on Economics of Far East Countries

Essay on Economics of Far East Countries

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Some countries in Asia have sufficient latitude on the fiscal front. Singapore and Hong Kong are highly fiscally flexible – both have been running years of fiscal surpluses, have negative net government debt (due to large fiscal reserves – S&P estimates HK and Singapore’s net general government debt position at -32.6% and -83.9% of GDP, respectively, in 2010) and can provide a backstop if economic conditions significantly deteriorated, though historically, Singapore has been more fiscally interventionist than Hong Kong. Korea has relatively low general government debt at 31% of GDP), incurred a better than expected fiscal surplus last year and have been historically quite activist in its fiscal policy, as demonstrated by the post Lehman environment where, outside of China (which funded a big part of its stimulus off-budget via banks), Korea had the largest fiscal stimulus program in 2009. With Korea’s National Assembly elections coming up in April 2012, presidential elections in December 2012, we expect formulation of next year’s budget will be sensitive to global conditions. China has significant fiscal flexibility as well. We think the concerns about contingent liabilities and local government debt burden and more limited fiscal space in China is overblown. China’s outstanding central government debt together account for about 18% of GDP, and if we assumed that the RMB10.7 trillion (27% of GDP) of local government related debt announced by the National Audit Office at the end of 2010, then general government debt would still only be around 45% of GDP (though if we net out Chinese government deposits, it would be about 43% of GDP and the net figure would be even lower if we factored in financial assets of SOEs. Moreover, growth h...

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...debt whose perceived risk profile has notably changed; 3) with inflation risks still a concern but US rates at near-zero levels for longer, the monetary policy mix may be shifting now to tightening via RMB appreciation than using interest rate/liquidity tools, and the best time to let RMB move faster without exacerbating speculative capital inflow is when global risk sentiment is poor and offshore speculative positioning has lightened up. CNY stability coupled with central bank FX intervention in a region where inflation risks are still there could help keep Asia FX relatively low beta vis-à- vis other risk currencies. In the near-term, we would remain very cautious and we would be lightly positioned – though bouts of weaknesses could provide opportunities for countries with solid fundamentals and where central bank provides support to cap volatility – KRW and IDR.

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