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Asia’s Deceptively Strong Fiscal Position
While western commentators wring their hands, the numbers tell a different story
The intellectual bias of mostly western commentary on the supposed high risks of investing in “emerging markets” is again roiling stock and currency markets. The failure of these analysts to judge their own nations’ debts and currencies by the same yardsticks is astonishing.
Who would guess, for example, that the much-despised Indonesian rupiah has behaved roughly in line with the Australian dollar over the past five years. Its five-year government bonds yield around 7 percent, the Australian equivalent, 0.3 percent. As for debts, the net international investment position of Australia is minus US$890 billion compared with the minus US$338 billion for Indonesia, a nation with a population almost 10 times larger.
Nor is Australia alone for its long reliance on capital inflows for equity investment and bank finance. The US and UK not long ago had very large net positive international investment positions. They are now deep in the red – about US$600 billion in the UK case, US$11 trillion for the US and falling further.
The Economist magazine this week has two interesting tables, not deliberately linked. One is of a ranking of emerging market debt and foreign exchange vulnerabilities judged by four factors – public debt, foreign debt, costs of borrowing and foreign exchange reserves measured against current account deficit and short-term liabilities.
Top of the tree for Asia are Taiwan and South Korea. But why they should be considered ‘emerging” is curious. But in a list of 66 countries, at the bottom of which are Zambia, Lebanon and Venezuela, are some outstanding Asian performances. The Philippines and Thailand rank above Saudi Arabia and Bangladesh above China at 10th place. Vietnam at 12th and Indonesia at 16th are ahead of India and several EU members. But Malaysia lags largely due to its government debt, and with continued capital outflow negating a current account surplus
These weightings are clearly subjective but the results illustrate a general point about the diversity of these so-called emerging markets. But a better perspective would be provided if they were linked to other tables at the back of the same magazine listing forty-two countries with the latest data on inflation, exchange and interest rates and projections for 2020 on the current account, budget balance, and GDP.
True or not, these projections should make encouraging reading for many in Asia. But certainly not the UK, where the budget deficit is forecast at 14 percent of GDP and the current account deficit at 2.3 percent, meanwhile 10-year bonds yield a derisory 0.3 percent. The US is not much better, with a budget deficit projected at 10 percent of GDP, the current account at 1 percent and 10-year bonds at 0.5 percent. The euro area as a whole is projected to
Australia and Indonesia come out as very similar, with budget deficits of 4.8 percent and 5.4 percent respectively, current account deficits of 1.1 percent and 1.5 percent but 10-year bond yields at 0.9 percent and 8.0 percent while inflation forecasts are 1.7 percent and 1.3 percent. Indonesia, however, is forecast to achieve 1 percent GDP growth compared with a decline of 0.5 percent for Australia and 3-6 percent for the US, the UK and the eurozone, with smaller declines for Japan, Taiwan and South Korea and small growth for China and India. Thailand is worst affected in non-oil Asia with a fall of 5.9 percent due to the collapse of tourism and drought.
The data are short-term and the projections may be wrong by a long way. Neither say anything about the longer-term impact of the pandemic on future consumer demand, supply chains and trade restrictions. Those are currently incalculable. But for those who can get beyond scary headlines, countries with governments that began the pandemic with debt ratios of under 60 percent of GDP – in this region they include Thailand, Vietnam, Philippines and Indonesia – not only have far superior bond yields to developed countries which mostly have far bigger public debt levels. They also have some inbuilt economic growth which make suture debt service more manageable even though interest rates are higher.
None the above addresses the issue of corporate debt which varies widely across developed and developing worlds – for example, high in the US but not in cash-rich corporate Japan, high in China but not in the Philippines or Indonesia. But at least the data and projections that while emerging Asian bonds and equities may not be cheap, they are a giveaway compared with their US, and many European and Australian equivalents.