KUALA LUMPUR:  The deep global recession and massive fiscal pump priming have put significant strain on the fiscal deficits of the US, Europe, Japan and some emerging economies. In some countries, the government debt to GDP ratio has soared to double-digit levels, leading to sovereign risk pressures on fear that the unsustainable fiscal imbalances could trigger a debt crisis similar to the 1982 Mexican debt crisis, says CIMB Economics Research.

The IMF estimates that the government debt to GDP ratio of advanced members of the G-20 is likely rise to 118% on average by 2014 while that of emerging market members falls to 44%.

• Eurozone fiscal stability at risk. Worries about the swollen budget deficits of Greece, Portugal and other members of the 16-nation euro bloc have raised the spectre of sovereign debt defaults and threaten the long-term stability of Europe’s common currency. These economies such as Greece, Ireland, Spain and Portugal suffered twin deficits in the budget and current account. The most troubled country in the eyes of investors and rating agencies is Greece, with a government debt to GDP ratio of 124.9% and budget deficit of 12.2% of GDP in 2010.

• Implications of running excessive fiscal deficits. More important is the risk that investors may lose confidence in the sovereign debt of major countries. Credit default swap spreads (CDS) on these countries have risen, leading to weakened currencies and rising bond yields.

The negative implications are (i) the impact on bond yields due to higher risk premiums, reflecting concerns about fiscal sustainability and government solvency; (ii) increased government borrowings will have an impact on long-term interest rates; (iii) higher public debt can also raise expectations of tax increases and inflation, undermining business and consumer confidence; and (iv) private savings would increase in anticipation of tax rises in the future to service the large debts, reflecting the inter-temporal budget constraint.

• Credible fiscal consolidation plan. In the near-term, global investors will pay more attention to what is unfolding in Greece and other high-risk economies in the eurozone. The global financial markets will remain volatile until there is clarity on the resolution of funding. We expect Greece and the EU to make more announcements aimed at calming markets, avoiding disorderly debt and corporate markets functioning as well as reducing fears of contagion risk spreading across Europe and to other regions.

In our view, investors’ perception about sovereign risk will be influenced by a number of key factors: (i) a country’s debt financing capacity; (ii) whether it has a credible plan for fiscal consolidation; (iii) its status as a “safe haven” relative to other countries; and (iv) the flexibility of its exchange rate.

• Sovereign debt contagion to Asia? Not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. For Asia, we see a set of fundamentals that can be associated with a relatively "risk free" zone. Fears of sovereign debt contagion spreading to Asia are buffered by Asia’s strong economic and financial fundamentals.

Public debts to GDP for Malaysia, Thailand and Indonesia are manageable and are not approaching debt sustainability limits. These economies still enjoy healthy current account surpluses while their budget deficits are projected to narrow in the medium-term. Most economies rely on domestic sources of funds to finance their budget deficits. Other fiscal and external stability indicators such as foreign reserves, domestic savings, external debt, and net interest payments to revenue support the underlying sustainability of fiscal debt management.


Eurozone fiscal stability at risk. Worries about the swollen budget deficits of Greece, Portugal and other members of the 16-nation euro bloc have raised the spectre of sovereign debt defaults and threaten the long-term stability of Europe’s common currency.

The most troubled country in the eyes of investors and rating agencies is Greece, which prompted close scrutiny by the EU commission to avoid disorderly debt and corporate markets functioning. If Greece were allowed to go under, the cost of borrowing for other troubled euro members would shoot up.

Banks holding troubled countries’ bonds would also suffer. Portugal is next in line. Its public-debt ratio is 77.4% in 2009 and rising. The EU Commission has endorsed the Greek government’s plan to cut the deficit from 12.7% of GDP in 2009 to 8.7% by 2010, 5.6% in 2011 and 2.8% in 2012.


Investors’ perception about sovereign risk will be influenced by a number of key factors: (i) a country’s debt financing capacity; (ii) whether it has a credible plan for fiscal consolidation; (iii) its status as a “safe haven” relative to other countries; and (iv) the flexibility of its exchange rate. Without a credible fiscal consolidation plan, investor confidence could begin to flag, leading to weakened currencies and rising bond yields.

Anchoring medium-term expectations of fiscal sustainability should help to contain borrowing cost pressures while ensuring continued access to global savings and also underpinning investor’s confidence. Investors still favour the US dollar given its status as the world’s largest reserve currency.

Sovereign debt contagion on Asia? We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks.

For Asia, we see a set of fundamentals that can be associated with a relatively "risk free" zone. Fears of sovereign debt contagion spreading to Asia are buffered by Asia’s strong economic and financial fundamentals. Although Asia’s CDS have risen in the wake of Greece problems, but we believe will be temporary.

Given Asia’s well managed financial prudence as well as sound macroeconomic management, we do not expect international rating agencies to flash their concerns on potential sovereign debt risk in the region.

India though has a high government debt to GDP ratio of 75% but it is financed almost entirely from domestic funds given its high savings. Similarly for Japan, the high savings rate has allowed the government to finance its deficit internally though the debt to GDP ratio has grown from 65% in the early 1990s to almost 200% now.

For ASEAN, public debts to GDP for Malaysia, Thailand, Indonesia and Philippines are manageable and are not approaching their debt sustainability limits. These economies still enjoy healthy current account surpluses while their budget deficits are projected to narrow in the medium-term.

Most economies rely on domestic sources of funds to finance their budget deficits. Other fiscal and external stability indicators such as foreign reserves, domestic savings, external debt and net interest payments to revenue also support the underlying sustainability of fiscal debt management.

I. Indonesia’s government debt to GDP ratio of 30% in 2010 is the lowest among ASEAN countries and it has secured sufficient external funds to part finance its budget deficit. On 23 Jan 10, Fitch Ratings upgraded Indonesia’s long-term foreign and local-currency credit ratings to the highest level since the Asian financial crisis, citing the economy’s resilience to the global crisis and better finances. Moody’s Investors Service said on 21 Jan 10 its Ba2 rating on Indonesia remains stable, while Standard & Poor’s raised the outlook on its BB rating for the country to positive on Oct. 23 09.

II. Malaysia’s fiscal consolidation remains a medium-term policy, going by the smaller budget deficit of 5.6% of GDP targeted for 2010, a reduction from 7.4% of GDP in 2009. This will be achieved through a drastic 13.7% cut in operating expenses (mainly on subsidies, supplies and services). Under the 10MP (2011- 2015), it is hopeful that the proposed cut in both the development and operating expenditure as well as enhanced revenue base will lower the budget deficit to 3% of GDP in 2015. The budget deficit is largely funded from domestic liquidity given the high national savings of 32.5% of GDP in 2009.

III. Based on the Thai government’s revised budget expenditures estimate for the fiscal year 2010, we estimate a lower budget deficit of between 2.5-3% of GDP in 2010 from 2009’s deficit of 4.1% of GDP. The authorities raised temporarily the mandatory debt ceilings to finance the deficits. The public debt to GDP ratio is expected to reach 58% by 2012 from 45.7% currently. Thai’s national savings rate was 29.4% of GDP in 2008.