Shrinking fiscal space may be a risk in Asia, study shows

SHRINKING fiscal space may become a risk in Asia despite debt that has remained relatively sustainable, research from the Asian Development Bank (ADB) showed.

Georgetown University Professor Marcelo M. Giugale at a briefing on Wednesday said Asian debt is sustainable “for now,” noting that there are still some risks.

“The fiscal space has been shrinking, and is projected to continue shrinking,” he said. “It’s difficult to see how the reconstruction and the recovery will be funded.

Mr. Giugale is the editor of the ADB book, The Sustainability of Asia’s Debt, published on Feb. 17.

He expects two major trends in Asia in the coming years. The first is the retrenchment of expenditures related to the pandemic, including subsidized loans.

“The second retrenchment is monetary,” he said. “That retrenchment will not be painless. We’ll see it in housing — the cost of mortgages. We’ll see it in consumer credit.”

He said debt sustainability will be the dominant global issue post-pandemic.

“Asia has been borrowing fast, extremely fast,” he said. “That was before the pandemic. The pandemic made it a lot worse.”

The Philippines had “limited” fiscal space leading up to the pandemic, showing the sustainability levels of its fiscal position as it responds to coronavirus-related shocks, the ADB book showed.

The book classified the Philippines — along with Myanmar, Bangladesh, Indonesia, among others — as having limited fiscal space. These countries had a fiscal sustainability gap between -2% and 2% of their gross domestic product (GDP) in 2019.

The fiscal sustainability gap, or the difference between the overall fiscal balance and what is needed to stabilize debt-to-GDP ratio, is a key measure of fiscal space, IMF economist Andrea F. Presbitero said in the book.

This fiscal space indicates the capacity of countries to deal with the impact of unexpected shocks, including that of the coronavirus disease 2019 (COVID-19).

“Our analysis shows that developing countries have to deal with the current crisis starting from a weaker fiscal position than they had before the global financial crisis,” Ms. Presbitero said.

“However, Asian developing countries are in a better position than other developing countries, thanks to a more prudent fiscal policy in recent years.”

Countries with “high fiscal space” like Cambodia have a gap over 2% of GDP. On the other hand, countries with no fiscal space like India and China have fiscal sustainability gaps less than -2% of GDP.

For developing countries with no fiscal space, debt relief and higher concessional lending could help reduce debt and improve fiscal space, Ms. Presbitero said.

“Countries with fiscal space could instead develop a prudent borrowing strategy to preserve public investment plans also in the short term, by diversifying their financing sources.”

The Philippines ended 2021 with P11.73 trillion in outstanding debt, up by almost 20% year on year and pushing the country’s debt-to-GDP ratio to 60.5%.

The Department of Finance (DoF) is preparing a fiscal consolidation plan as it transitions to the next administration, but has not yet shared details.

The Institute of International Finance’s global debt monitor said $10 trillion in global debt was added last year, bringing the total figure to a record $303 trillion.

“While the pace of accumulation slowed in 2021, emerging market government debt levels remain elevated,” the report said.

For the Philippines, government debt as of the fourth quarter last year represented the equivalent of 58% of GDP, higher than 51.7% a year earlier.

Households represented 15.7%, while corporations accounted for 32.1%. The financial sector represented 10.4%. — Jenina P. Ibañez