DBS Bank 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. DBS Bank expects 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 increasing 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.
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 The region’s governments have withdrawn pandemic support as economies recovered from the worst of the crisis.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.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 signaled in Budget 2023 that it is looking and planning to move gradually towards a targeted subsidy mechanism. Thailand has also subsidized 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. DBS Bank expects 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, DBS Bank is 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 DBS Bank does 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.
Indonesia
Indonesia temporarily suspended its legally mandated deficit and debt thresholds since 2020, through the pandemic but committed to reinstate thresholds in 2023. Accordingly, next year’s deficit has been projected at -2.84% of GDP, below the 3% ceiling from an estimated - 3.5% of GDP this year. Underlying economic assumptions for 2023 GDP and inflation are at 5.3% and 3.6% respectively. While growth expectations are anchored, inflation forecasts might be subject to upside risks. The math counts on a 9% jump in revenues vs 2022, mainly on tax collections whilst a moderation in non-tax receipts has been built in, likely on lower resource-based windfall as global prices come off highs. Expenditure is seen marginally lower vs this year.Even during the pandemic, fiscal performance had not deteriorated sharply, with the deficit run-rate in 2022 (year-to-date) well within projections. Cushion from strong non-oil & gas as well as O&G related receipts, besides tax collections (VAT was increased in mid-22), helped to finance the wide subsidy bill and pandemic-related support measures (PEN program, directed at the healthcare sector, vaccination, small businesses, credit support, etc). Factoring in the recent increase in subsidised fuel prices, the subsidy bill is expected to fall from -1.1% of GDP in 2022 to - 1% next year, and less than a third of -3.4% in 2014.Indonesia’s low tax revenue to GDP ratio has been flagged as a long-standing constraint, below the 15% threshold which the IMF views as necessary to stimulate the economy and push growth towards its potential pace.To read the full report, click here to Download the PDF.
Radhika Rao
Senior Economist – Eurozone, India, Indonesia
