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Southeast Asia's expansionary fiscal budgets put markets on edge

Governments struggle to maintain growth amid trade war and looming elections

SINGAPORE -- Southeast Asian governments are expected to spend more this year as they try to prop up growth and address domestic challenges, unnerving market players who fret that heavier spending and falling government revenues will combine to upend the region's economy.

Total government spending in six Southeast Asian countries -- Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam -- will likely exceed $500 billion in fiscal 2019, an increase of nearly $40 billion, or 8%, from the previous year at current exchange rates.

The region's expansionary fiscal plans, however, pose an economic risk. According to a recent report by Citigroup, budget deficits are forecast to rise this year in Indonesia, the Philippines, Singapore and Thailand by 0.1 to 0.4 percentage points of gross domestic product, likely adding to swelling government debts.

That, in turn, could affect their sovereign ratings, triggering a sell-off in local currencies and stocks. Any such swoon would be bad news this year, particularly as an economic slowdown may eat into tax revenues.

Singapore will announce its draft budget for the fiscal year ending March 2020 on Feb. 18. Economists expect it to be expansionary and include help for small and medium-size companies, as the city-state faces a tougher economic environment. The Straits Times newspaper quoted Prime Minister Lee Hsien Loong as saying he saw "dark clouds" on the horizon and expected progress to be "harder than last year," in a speech to ruling party members over the Chinese New Year holiday.

"In light of the uncertainties in global trade tensions, a measured expansionary approach, while ensuring the sustainability of Singapore's fiscal position, will be expected," said Mark Gan, an instructor at the National University of Singapore Business School.

In last year's budget, expenditures rose to 80 billion Singapore dollars ($58 billion), up 8% from the previous year, as the government increased health care and other social spending. Singapore's Oversea-Chinese Banking Corp. forecasts another 4% rise in the 2019 budget due to higher costs for the elderly support program, while tax revenues are expected to remain flat versus last year.

Barnabas Gan, an economist at United Overseas Bank, said in a report that social spending will continue to climb. "On the back of [a] moderating domestic economy, coupled with Singapore's rising needs, we perceive a potentially expansionary budget into fiscal year 2019." Gan also said that measures to help companies digitize and innovate are essential to the future of Singapore's economy.

Other countries in the region also planning expansionary budgets. Malaysia's spending is expected to rise 10% to 313 billion ringgit ($76 billion) as the government readies a massive rebate on taxes collected by the previous government of Najib Razak.

The Philippines has announced a change to its fiscal accounting in its 2019 budget. Its expenditure target, at 3.757 trillion pesos ($72 billion), is up 13% from the previous year based on the new rules. Infrastructure and education are among the country's key outlays this year.

In Vietnam, whose fiscal year starts in January, the budget reached 1.63 quadrillion Vietnamese dong ($70 billion), a big rise from this year's estimated outlay of 1.272 quadrillion dong. Actual spending in Vietnam tends to come in below budget.

Government spending in Southeast Asia has continued to expand in the past few years, along with the regional economy. But this year, economic uncertainties such as the U.S.-China trade tensions and global tech slump have clouded the outlook. Fiscal measures are likely to be needed to support growth.

Indonesian President Joko Widodo's government increased fuel subsidies and spending on government workers’ salaries and pensions.   © Reuters

"With monetary policy only just normalizing, the burden of policy support to buffer against slower growth will fall on fiscal policy, with elections to provide additional impetus for populist stimulus," the Citigroup report said, referring to planned or possible elections in Indonesia, Thailand, the Philippines and Singapore this year.

Indonesia's budget, the largest in the region, with an expenditure target of 2.43 quadrillion rupiah ($173 billion), has a pre-election tint. While slowing the pace of infrastructure spending, President Joko Widodo's government increased fuel subsidies and salaries and pensions for government officials. The country will hold a presidential election in April.

There is also speculation in Singapore about an early general election. UOB's Gan pointed out that in the previous pre-election budget, in 2015, the government took additional fiscal measures, such as corporate income and personal tax rebates and a support scheme for the elderly.

Some countries are therefore looking at new ways to raise money. Malaysia scrapped its 6% goods and services tax last June, soon after Mahathir Mohamad became prime minister, cutting off a stable source of revenue. In 2019, the government will rely more heavily on dividends from state-run oil company Petronas, though ups and downs in the price of crude present an additional risk.

Singapore last year said it would raise its goods and services tax to 9% in the early 2020s, up from 7% now, to support rising health care spending. Additional sources of cash will be the focus of next week's budget announcement. A new on tax on soft drinks aimed at reducing obesity and diabetes could be introduced, Citigroup said.

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