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Putting ASEAN’s fiscal genie back in the bottle

Chief Economist, South-East Asia and India & Economist, ANZ

2022-08-01 00:00

Unwinding the pandemic-induced surge in public debt for economies across south-east Asia and India will be challenging.

The pandemic has structurally weakened fiscal parameters. Policymakers in the region have signalled a gradual path of fiscal consolidation, but this will be sensitive to favourable macroeconomic conditions, including robust growth and reasonable interest rates.

With policy tightening either in progress or on the cards across many regional economies and the odds of a global slowdown rising, even gradual fiscal consolidation may not be smooth.

Weaker fiscal parameters carry adverse implications. Apart from limiting the policy space to cope with growth shocks in the future, they could result in structurally higher interest rates, particularly as the credit cycle is turning around.

Moreover, the reduction in public savings during the pandemic implies weaker current account balances or lower investment rates. In this sense, fiscal deterioration is likely to lower the longer-term growth potential of these economies.


Compared with pre-pandemic levels, end-2021 public debt was higher by 14.6 per cent of GDP (average) in India, Indonesia, Malaysia Thailand and the Philippines, a major structural change to these economies.

The largest increase amounted to nearly 20 per cent of gross domestic product (GDP) in the Philippines. India and Thailand saw levels only marginally lower than that.

In addition, mandated public debt ceilings were relaxed in India, Indonesia, Malaysia and Thailand. The Philippines does not have a mandated ceiling but nonetheless, debt has exceeded 60 per cent of GDP, the threshold regarded by policymakers as prudent.

The scale of fiscal expansion has been such that a larger share of government revenues is used to service debt, meaning affordability has weakened despite significant reductions in policy rates and other efforts to control bond yields. 

In ANZ Research’s view, these higher debt-servicing outlays are likely to compromise developmental spending and long-term growth potential.


Regional expectations for the full year are for only a modest reduction in debt, with targets still leaving budget deficits well above pre-pandemic levels. This reflects the need for these economies to address the uneven post-pandemic recoveries and income inequality.

Though year-to-date revenue growth has been consistent or even exceeded budgeted projections, they are being allocated towards meeting higher than planned subsidies on fuel, utility and food costs.

Indonesia has seen a 47 per cent surge in revenues over the first five months of 2022, helped by both high commodity prices and tax reforms. Despite this, the government expects a full-year deficit of 3.9 per cent of GDP. Although this is a marked improvement from the 6.1 per cent peak seen in 2020, it remains well above the average of 2.2 per cent in the three years prior to the pandemic.

Available guidance for 2023 across the economies in question suggests further consolidation ahead, but deficits will remain elevated by pre-pandemic standards.

Preliminary guidance from the Indonesian government is a deficit target of 2.61 per cent to 2.85 per cent of GDP, based on real GDP growth of 5.3 per cent to 5.9 per cent.

Meanwhile, Thailand’s latest budget bill has pencilled in a deficit of 3.9 per cent of GDP, broadly unchanged from the previous target.

In the Philippines, policymakers are targeting a reduction of 1.5 per cent from a 2022 estimate of 7.6 per cent of GDP. This is planned to be followed by a 1 per cent reduction each year up to a total of around 3 per cent in 2026. 

The pre-pandemic medium-term objective in the Philippines was to stabilise the budget deficit at this level.

Behind this is a combination of expenditure reduction and revenue enhancement, the latter recovering to the country’s 2019 pre-pandemic level of 16.1 per cent of GDP. While this is not a tall order, the underlying assumptions of annual real GDP growth being sustained at 6 per cent to 7 per cent will be challenging.


Fiscal plans for India and Malaysia are more fluid. In India, the government has flagged a deficit of 4.5 per cent of GDP by fiscal 2026 but specifics on revenues, expenditures or the broader macroeconomic assumptions have not been released.

For Malaysia, the government has indicated that the budget deficit will average 5 per cent of GDP between 2022 and 2024.

Based on the 2022 target of 6 per cent, the deficit will need to average 4.5 per cent of GDP in 2023 and 2024.

Once again, attaining this target will require politically challenging new revenue streams and solid growth of around 5.5 per cent.

The bottom line for policymakers in ASEAN and India is a preference for gradual fiscal consolidation.

But even this pace of fiscal consolidation is contingent on macroeconomic conditions remaining favourable.

In ANZ Research’s view, even a modest decrease in macro conditions can disturb targeted fiscal parameters and public debt.


To illustrate the sensitivity to macroeconomic conditions, the below table illustrates the impact of higher funding costs or the effective interest rate on public debt, lower nominal GDP growth, and a higher primary or non-interest budget deficit.



Base case - Public debt (% of GDP, 2022)

Case #1 - Effective interest rate rises by 1%

Case #2 - Nominal GDP falls by 1%

Case #3 - Primary balance / GDP falls by 1%

Case #4 - #1, #2, #3 occur simultaneously































*FY23 (April 2022 to March 2023), central government only. Source: National budgets, ANZ Research

For clarity, ANZ Research has considered the impact of each of these variables in isolation and in combination, because the variables are inter-related.

The isolated sensitivities suggest public debt levels are most impacted by a slippage in the primary balance. The rise in public debt is nearly the same as in the primary balance. Changes in nominal GDP growth and the effective interest rates also matter but less so.

At the same time, under the combined three variables, public debt can rise substantially from the base-case level. ANZ Research believes this scenario is not unrealistic in the current environment.

On effective interest rates, changes tend to be gradual, as adjustments in policy rates and bond yields impact only the incremental debt raised. Analysis suggests the feedback from bond yields to the effective interest rate can take time.

Sanjay Mathur is Chief Economist, South-East Asia and India & Krystal Tan is an Economist at ANZ

This story is an edited excerpt from the ANZ Research report “Asia: a structural turn in fiscal positions”, published July 20, 2022.

Putting ASEAN’s fiscal genie back in the bottle
Sanjay Mathu & Krystal Tan
Chief Economist, South-East Asia and India & Economist, ANZ


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