Southeast Asia’s Job After Covid-19: Grow Their Way Out
Enormous budget deficits will require new tactics
By: Pratiwi Kartika
Southeast Asia has entered a new policy arena, with countries forced inevitably to adopt enormous budget deficits this year and most likely for the next few. Indonesia, the Philippines, Singapore, and Malaysia have ratios of budget deficits to GDP at 6.3 percent, 8.4 percent, 15.4 percent, and 5.9 percent respectively, their highest in decades, except for Malaysia whose ratio was 6.7 percent in 2009. Their only hope is to grow their way out.
While the fiscal conditions of these countries are relatively healthy, the World Bank, in its fiscal impact analysis describes the first stage necessary to recovery as relief from the crisis, as governments are now attempting to do through spending. The second is dragging budget deficits back down to their normal levels in economic recovery. Both of these goals are difficult to meet.
History tells us that budget deficits generated by increases in domestic borrowing result in rising interest rates and higher cost of capital, which then pulls down private investment. Research by Easterly and Schmidt-Hebbel (1993) on developing countries finds that unfortunately, rising interest rates don’t necessarily lead to a surge in private saving. They also find that high interest rates and tax cuts, which usually cause budget deficits, increase private consumption, which does stimulate economic activity but not for long-term growth.