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Further fiscal consolidation in store in 2023
After two years of pursuing an accommodative fiscal stance to counter the fallout of Covid on the health of the populace, incomes and employment, ASEAN-6 governments returned to a consolidative tone this year and we expect further narrowing in fiscal deficits in 2023. This was necessary on three counts: a) to keep fiscal policy in sync with the withdrawal of monetary accommodation, b) complements efforts to contain inflation and inflationary expectations; c) prudent policy direction to prevent further deterioration in fiscal and debt metrics just as borrowing costs ratchet higher.
Reopening tailwinds coupled with strong commodity-driven trade outperformance provided a strong cushion to revenues for most ASEAN-6 countries this year, besides a lift from high nominal growth rates. This helped to gradually scale back pandemic-era aid packages and consolidate finances. Dynamics will be different next year. While justified and necessary, governments face a conundrum next year on the pace of a reduction in deficits, as growth is set to moderate. Deficits are likely to stay higher than pre-pandemic levels.
We discuss the ASEAN-6 fiscal dynamics from a few lens
Consolidation efforts in the region can be seen from the shift to negative fiscal impulse (measured by our estimated change in cyclically adjusted primary fiscal balances) in 2022. While on track, the improvement in fiscal accounts still has a long way to go vs the very expansionary stance adopted during the pandemic driven by the unprecedented health crisis. We expect the fiscal impulse to remain negative through 2023 regionally, except for Vietnam – which has introduced an economic recovery package in early-2022 that is set to last through next year.
After a year of strong revenue collections in 2022, aided by private sector recovery, reopening boost lifting consumption and trade-related flows (resource-based, customs etc.), revenue challenges are set to surface in 2023. A downshift in economic growth poses risks to revenues (numerator) as well as nominal GDP growth (denominator), in the face of mounting global external headwinds, making it a tougher environment for businesses, consumers, and trade activity, and related tax collection.
Looking beyond near-term challenges, tax revenue as a share of GDP has been on a structural downtrend across the region pre-pandemic and over the past decade, except for the Philippines. Governments are taking varying approaches to tackle this.
Indonesia and Malaysia stand out with the lowest tax revenues as % of GDP amongst peers. Indonesia’s share has held around 10% of GDP, while Malaysia’s hovered at ~11% in recent years. For Indonesia, efforts to offset this Achilles heel is underway, by for instance increase in the value-added tax (VAT) rate this year besides indirect taxes (cigarettes, carbon tax, one-off voluntary amnesty scheme) to provide relief. Ultimately, a wider tax base will be required to structurally improve the ratio. Malaysia’s tax base weakened further after the replacement of the goods and services tax (GST) post the 2018-elections. No new revenue measures were announced in Budget 2023, and all eyes will be on the government’s medium-term revenue strategy after the 15th General Elections in November 2022.
Within the region, Singapore looks to bolster its tax revenues through a GST hike to 9% from 7% that will be implemented in two stages - one percentage point each time on Jan 1, 2023, and subsequently on Jan 1, 2024. Philippines will aim to retain the positive momentum and reforms undertaken by previous President Duterte under the new Marcos administration, which took over in mid-2022.
Tax revenues as a share of GDP for Thailand and Vietnam are among the highest in the region but were pressured by various tax cut measures during the pandemic and to deal with the current rising living cost problem.
Expenditure cutbacks will play a part in ASEAN’s fiscal compression amid a tougher revenue backdrop. The region’s governments have withdrawn pandemic support as economies recovered from the worst of the crisis. Overall expenditure a share of GDP is trending lower from 2021’s peak across the region, except for Vietnam.
The composition of the region’s expenditures shows a reduction in current expenditures, but a continued emphasis and support on development/capital spending over the coming year. As external trade and consumption pent-up demand growth engines slow in 2023, economies will seek to redirect funding towards infrastructure and public investments to boost the recovery momentum. Some of these plans will also underpin expenditure, necessitating national governments to mull over fresh revenues sources.
Focus on development/capital expenditures is seen especially in Vietnam and the Philippines, where infrastructure is lagging the region, and just as in Malaysia. The latter two are already large spenders in the region at around 5% to 6% of GDP, and their ratios will stay high over the next few years. Infrastructure development is a key part of Vietnam’s economic recovery package for 2022-23, while the Philippines’ Marcos administration is expanding the flagship infrastructure program of its predecessor to ‘Build, Better, More’. Malaysia plans to raise infrastructure spending based on Budget 2023 plans and to catch up after lagging on development goals set out in its 12th Malaysia Plan.
Concurrently, rising inflation has also seen the region provide support to cushion the increased costs of living, slowing overall expenditure reduction.
The sharp rise in global commodity prices forced few countries, especially Indonesia and Malaysia, to extend fuel subsidies, which were funded by windfall gains from commodity-driven revenues. However, the rising strain on public finances prompted Indonesia to hike the prices of commonly used fuel variants by an average 30% in early Sep22. Malaysia also signalled in Budget 2023 that it is looking and planning to move gradually towards a targeted subsidy mechanism. Thailand has also subsidised prices ranging from retail diesel to cooking gas over 2022. However, a depleted state oil fund has forced an upward adjustment to diesel price and shift to partial subsidies. Lastly, Singapore has rolled out two packages worth SGD 3.0bn in total so far in 2022 to help mitigate the impact of high inflation.
One of the key vulnerability indicators are the public debt levels. As a starting point and encouragingly, average ASEAN-6 debt level was below 50% of GDP prior to the pandemic. Higher spending requirements and a slump in growth has since lifted debt levels since 2020 and are likely to stay above the pre-pandemic levels at least for over the next 3-4 years, except for Vietnam where debt levels have been on a downtrend since peaking in 2016.
During the pandemic, few ASEAN economies also relaxed their public debt limits. Indonesia had temporarily relaxed its legally mandated threshold for the three years to 2022. Debt levels have already begun to ease since the 2021 peak of over 40% of GDP. Malaysia’s statutory debt limit (comprising of Malaysian Government Securities, Malaysian Government Investment Issues, and Malaysian Islamic Treasury Bills) was raised twice during the pandemic to 65% of GDP from 55% previously. We expect its statutory debt to stay slightly below the limit, and the limit is likely to be extended beyond the initial expiry at end-December 2022. Thailand also raised its public debt-to-GDP ceiling to 70% from 60%, starting from September 2021, due to large pandemic-related spending. Thai public debt is likely to hover around 60% in the coming year. Nonetheless, a sharp rise in the region’s public debt during the pandemic and rising domestic interest rates from tighter monetary policies will raise interest payments.
Overall, relatively well-managed public finances and a refocus on fiscal consolidation after the pandemic lend a source of macro stability for the region. Hence, we are sanguine on this space for ASEAN-6 countries even if the speed of consolidation slows next year on the back of a growth slowdown.
While we do not foresee any unfavourable sovereign rating re-assessment on public finances for the ASEAN-6 countries, rating agencies are likely to closely watch the shape and speed of consolidation. Most of the economies are on stable watch, apart from Philippines (on negative outlook by one of the agencies), and Vietnam (on positive outlook by one).
Singapore and Indonesia are likely to register the most improvement in their fiscal math in 2023, returning to net balances which are closest to their pre-pandemic levels. Notably, Singapore’s fiscal balance will return to a surplus in 2023, while Indonesia’s deficit will be back below the mandated -3% of GDP, after deteriorating to as much as 6% during the pandemic.
The Philippines, Thailand, and Vietnam will continue to run deficits larger than pre-pandemic and consolidate at a slower pace. Deficits in the Philippines and Thailand are, however, past their peaks, while Vietnam will press on with its economic recovery package that would stretch into 2023, which will widen the fiscal shortfall next year.
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