As South-east Asia central banks retreat, focus shifts to budgets

[SINGAPORE] Governments in South-east Asia are ramping up spending just as central banks are putting away their policy-easing tools.

From Thailand to Malaysia, states are boosting budgets for railways, roads and other infrastructure projects to help bolster growth in a region facing uncertain global markets and the threat of a pullback in trade under US President Donald Trump.

"Fiscal is going to be the main story this year," said Selena Ling, an economist at Oversea-Chinese Banking Corp in Singapore.

"All of these countries don't really have much room for cutting rates further. Their currencies may weaken more if rates are lower."

After years of policy easing, central banks in South-east Asia are turning their focus to reducing currency volatility and warding off inflation risks. Economists surveyed by Bloomberg predict the Philippines may be among the first central banks in Asia to raise interest rates this year, while Indonesia and Thailand are set to keep policy unchanged.

Governments in South-east Asia have room to spend. Indonesia, Malaysia, Singapore, Thailand and the Philippines collectively had a budget surplus as recently as in 2014, and a deficit of just 0.8 per cent of total gross domestic product in 2016, according to Tamara Henderson, an economist with Bloomberg Intelligence in Singapore.

Philippine President Rodrigo Duterte is seeking to widen the budget deficit to 3 per cent of GDP this year - from a goal of 2 per cent under the previous administration - as he embarks on an ambitious US$160 billion infrastructure programme.

In Thailand's under-performing economy, the government may boost its deficit for the fiscal year 2017 to as much as 4 per cent of GDP, after accounting for a supplementary budget, according to Nalin Chutchotitham, an HSBC Holdings Plc economist in Bangkok. The finance ministry estimates growth reached 3.2 per cent last year, well below its regional peers.

Election Budget

"It makes sense for a bit of a bolder spending plan while funding costs are still relatively low and economic stability is well maintained," Ms Chutchotitham said by e-mail.

"The economy had struggled a bit in the past two years for a more stable growth momentum, given subdued farm income and export weakness."

Malaysia is likely to maintain its deficit above 3 per cent of GDP ahead of a general election that must be held by mid-2018. In a recent note, Morgan Stanley analysts said the most recent budget passed in October features "feel-good measures" ranging from tax incentives to purchase smartphones to soft loans for civil servants to get new motorbikes, all of which should be supportive for growth.

Even fiscally-conservative Singapore, which rarely runs budget deficits, may be forced to announce stimulus measures for key industries later this month, said Vaninder Singh, an economist at Natwest Markets in Singapore. The city state's economy grew 1.8 per cent last year, the slowest pace since 2009.

Fiscal Rules

Possible targets for increased spending include the North-South Corridor, an expressway that crosses the island, and an enlarged commercial port Jurong, west of the downtown, Mr Singh said.

While both projects have already been budgeted for, additional money may be made available to speed up construction and create extra economic activity, he said.

"Singapore definitely has to spend more to stimulate the economy," Mr Singh said.

"I would expect that to be reflected in this budget."

Several countries in the region have fiscal rules, imposed mostly after the 1997 Asian financial crisis, restricting spending.

In Indonesia, the government has faced a strain on revenues because of lower commodity prices and weaker growth, putting pressure on the budget.

The deficit probably reached about 2.7 per cent last year, close to the 3 per cent ceiling. Even so, infrastructure spending has been rising over the years and is set to reach 16.7 per cent of total government expenditure this year, from 15.2 per cent last year, according to Morgan Stanley.

"Many places in South-east Asia have a need to improve their infrastructure," said Julian Wee, a senior market strategist at National Australia Bank Ltd in Singapore.

"This is probably timely, with economic growth decelerating somewhat."

BLOOMBERG