Arno Mong Daastøl <firstname.lastname@example.org>
Subject: [asia-apec 829] FW: IMF's new
Keynesianism according to Far Eastern Economic Review
Date: Sat, 24 Oct 1998 12:07:04 +0200
From: Kristen Nordhaug [mailto:email@example.com]
Sent: 23. oktober 1998 16:17
To: Arno Mong Daastol; Rune Skarstein
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 Fundannounced its policy about-turn in July. But economists say the size ofthese deficits won't be sufficient for badly needed bank capitalization andsocial safety-nets. What's more, governments are loath to fall too far intothe red, anyway.
As many experts see it, this impetus isn't strong enough.
such a 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 ofabout 200 billion baht
($5 billion) forecast for 1998 is
too little, given thatits
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 publics pending would be less in 1998 than it
was in 1997.
If that isn't tight money policy, what is?
Indeed, some economists believe the fiscal stimulus won't work
unless governments use their rising foreign-exchange reserves to
increasedomestic 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 toexpand, 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
Neiss believes a fiscal stimulus-handled properly-will help liquidity toflow back into Asia. He says confidence in the region would return byearly 1999, thus attracting private money, if global conditions arefavourable. This in turn will help governments to pay for bankrecapitalization, easing the burden of corporate debt.
But the IMF's target economies aren't completely
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
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
cheque that the fund is willing to write forsocial 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,
adirector 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 Asianmanufacturing 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 inChicago, doesn't think it will
return anytime soon to Asia-or to any emerging market, for that
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 andthe ADB can provide only a fraction of the needed funds. Tapping Asia'sprivate savings would be difficult. Few Asian countries have activemarkets for bonds, or other fiscal instruments, in which to pour savings.Depending upon the limited fiscal stimulus would be like depending upon afreak shower to reinvigorate a parched landscape.