The Fiscal Policy Role in Recession Economy and Issues to be Considered Roongthip Jindapol Visiting Scholar, PRI, Ministry of Finance, Japan 24 July 2007 1
Outlines I. Thailand s Fiscal Policy Role in Recession Economy II. Thailand s Current Issues to be considered Public Debt Fiscal Sustainability Framework Quasi-Fiscal Activities Fiscal Risk III. Japanese s Fiscal Policy Role in Recession Economy IV. Japanese s Current Issues to be considered Fiscal Consolidation Quasi-Fiscal Activities V. Thailand s Policy Implication 2
Fiscal Policies and Measures during crisis (July 1997- March 1998) Problems - Net international reserves were depleted dramatically. - Rapidly decline confidence in Thai baht currency - High current account deficit Expenditures - Cut the budget expenditures Revenues - Increased VAT from 7% to 10% - Increased import duties on luxury goods - Increased gasoline excise tax 1 baht per litter 3
Thai GDP 1997-2000 % 10.0 5.0 - (5.0) 8.4 6.4 6.5 6.1 4.4 4.8 4.0 3.4 2.4 1.0 (0.6) (0.2) 1997 Q1 Q2 Q3 Q4 1998 Q1 Q2 Q3 Q4 1999 Q1 Q2 Q3 Q4 2000 Q1 Q2 Q3 Q4 (1.4) (1.6) (4.2) (7.1) (7.2) (10.0) (10.5) (15.0) (13.9) (13.9) (20.0) GDP 4
Fiscal Policy after crisis (April 1998-2001) Problems Expenditures Debt - international reserve still decreased and less public confident on Thai baht currency - Adjusted fiscal policy from tighten to expansion fiscal policy - Withdrew loans from international agencies ; IBRD, JBIC, to increase international reserve and spent expenditures to stimulate economy 5
Fiscal Policy after crisis (April 1998-2001) Problems - Weak and ailing financial institutions and problems of Financial Institutions Development Fund (FIDF) Debt - Borrowed long term debt 500 billion baht to finance FIDF loss and solved problems in short term financial market which FIDF created significant distortions in financial market. 6
Fiscal Policy after crisis (April 1998-2001) Problems Expenditures Debt - To resolved high interest rate. - Issued government bonds 500 billion baht to restructure FIDF debt from short term loans to long term debt to solved FIDF s problems in financial market. 7
Fiscal Policy after crisis (April 1998-2001) Problems - To solved high inflation rate Revenues - Reduced tax rate to decrease goods and service price for instance by temporary cut VAT rate from 10 percent to 7 percent 8
Fiscal Policy after crisis (April 1998-2001) Problems - Capital outflow and shortage of liquidity. Debt - Borrowed external loans to inject liquidity to economy and allocated to special financial institutions to lend to people. 9
Fiscal Policy after crisis (April 1998-2001) Problems - Reduced adverse the social effects from the crisis. Expenditures - Increased expenditures to reduce social impact and the most vulnerable segments of society. - Issued social investment project to alleviate unemployment problem 10
Fiscal Policy after crisis (April 1998-2001) Problems Expenditures - Reduced adverse the social effects from the crisis. - Provided additional fund in the amount of 2,000 million baht to the Fund for Farmers' Assistance - Expanded the Education Loan Fund and relaxed the Fund s s lending criteria and increased budget and loans to provide scholarships for students with unemployed poor parents 11
Fiscal Policy after crisis (April 1998-2001) Problems - Reduced adverse the social effects from the crisis. Debt - Borrowed external loans through the Social Sector Program Loan to reduce social impact in labor market, social welfare, education and public health. - Loans to adjust structure in agricultural sector 12
Fiscal Policy after crisis (April 1998-2001) Problems - Economy recovery still was possible downsides risks and Thai people still didn t t have confidence in economic Revenues -Exemption of the personal income tax for the first 50,000 baht. - Extending the period of VAT reduction from 10 percent to 7 percent - Exemption of VAT rate of 1.5 percent on the sales of businesses with revenue exceeding 0.6 million baht but not exceeding 1.2 million baht per year 13
Fiscal Policy after crisis (April 1998-2001) Problems - Economy recovery still was possible downsides risks and Thai people still had not had confidence in their economic Debt - External borrowing from OECF, JEXIM and IRBD under the Emergency Decree authorizing the Ministry of Finance to borrow external loans to revive economy B.E. 2541 (A.D. 1998) 14
Issued Bonds to Solve FIDF Losses FIDF I 23 May 98 FIDF II 31 Oct. 00 FIDF III 23 Jun 02 Amount/ Kinds of Bond 500/Govern. Bond 112/ FIDF Bond (gov.. fully guaranteed) 780/Govern. Bond In billion THB Responsibility Govern. will responsible to pay interest expense and BOT will be amortized principal amount. 15
Interest obligation to govern. budget of FIDF bonds In billion THB FY FIDF1 FIDF2 FIDF3 1999-2006 262.488 13.789 76.665 2007 28.209-42.072 2008-2036 700.637 2008-2042 859.724 Total 991.334 13.789 977.462 Source : Fiscal Policy Office 16
Actual Total Debt of FIDF In billion THB 2000 2001 2002 2003 2004 2005 2006 Government Bond to raise an administer loans for FIDF 499 485 800 788 984 1,026 1,091 Debt of FIDF 0 0 340 418 380 402 232 Total debt related to FIDF Total public debt related to FIDF/GDP 499 485 1,140 1,206 1,364 1,428 1,323 10.1 9.5 20.9 20.4 21.0 20.1 16.9 Source : Public Debt Management Office 17
Factor to Increase Government Domestic Debt 18
Loan for FIDF and Loan for Financial Sector Restructuring and Total Govern. Domestic Debt to GDP 1996-2006 Govern. Bonds for FIDF Govern. Bonds for FIDF/GDP (%) 2006 In billion THB Total Govern. Domestic debt Total Government Domestic Debt/GDP (%) 1996 0 0 44 1.0 1997 0 0 32 0.7 1998 400 8.7 427 9.2 1999 547 11.8 642 13.9 2002 869 16.0 1,294 23.7 2006 1,162 14.9 1,797 23.0 19
Domestic Borrowing for Financing FY Proposed Domestic Borrowing Budget Deficit Proposed Domestic Borrowing / GDP (FY) (%) Actual Domestic Borrowing Billion THB Actual Domestic Borrowing / GDP (FY) (%) 1999 25 0.5 40 0.9 2000 110 2.3 108 2.2 2001 105 2.1 105 2.1 2002 200 3.7 170 3.2 2003 175 3.0 76 1.6 2004 100 1.6 90 1.4 2005-2006 0 0 0 0 2007 146 1.8 144 1.8 Total 861 732 9 20
Principal Outstanding for External Debt as of Sep. 30, 2006 In Million US$ Agencies Direct Government Loans Debt Guaranteed Total 1. IBRD 346.443-346.443 2. ADB 69.960 26.591 96.551 3. JBIC 2,121.159 4,664.214 6,785.373 4. Financial Market 1,080.041 300.000 1,380.041 5. Others 680.041 596.316 1,276.357 Total 4,297.634 5,587.121 9,884.755 Source : Budget in brief FY 2007, Bureau of the Budget 21
Government Domestic and External Debt 2,000,000 Million Baht 1,800,000 1,600,000 301,863 242,598 156,561 1,400,000 397,277 351,842 1,200,000 1,000,000 415,649 427,167 800,000 348,733 1,508,576 1,614,649 1,797,477 600,000 267,279 1,293,881 1,279,282 400,000 642,371 740,935 845,689 200,000 293,782 426,928 0 31,755 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Government Domestic Debt Government External Debt 22
Public Debt at the end of 30 Sep. 2006 million baht 3,400,000 60.0 57.8 3,277,498 3,300,000 57.2 3,233,120 55.1 55.0 3,200,000 3,126,555 3,100,000 49.3 50.0 50.6 3,000,000 2,934,431 2,943,008 47.3 2,930,041 45.0 2,900,000 2,804,279 41.4 2,800,000 40.0 2,700,000 2,600,000 35.0 2,500,000 30.0 FY 2000 2001 2002 2003 2004 2005 2006 Public Debt Oustanding Public Debt to Nominal GDP (%) percent of GDP 23
Central Government Revenue million baht 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 18.4 17.8 15.9 1996 1997 1998 1999 2000 2001 15.3 15.2 15.0 15.6 16.4 17.1 17.8 2002 2003 2004 2005 2006 20 07p Revenue Revenue/GDP (%) 17.1 16.816.6 2008p percent 19.0 18.0 17.0 16.0 15.0 14.0 Source : Fiscal Policy Office 24
Government Expenditures million baht 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 16.9 19.2 1996 1997 1998 Source : Fiscal Policy Office 18.3 18.1 17.5 17.6 18.4 16.6 1999 2000 2001 2002 2003 2004 2005 17.6 17.6 17.9 19.1 18.1 2006 2007p 2008p Expenditures expenditure /GDP (%) percent 20.0 19.0 18.0 17.0 16.0 15.0 25
Budget Structure FY 2007-2008 2008 In million THB Budget structure FY 2007 FY 2008 Amount +/-% Amount +/-% 1. Expenditures 1,566,200 15.2 1,660,000 6.0 (% of GDP) 18.6 18.3 - Current expenditures 1,135,988 18.5 1,209,547 6.5 (% of total budget) 72.5 72.8 - Capital expenditures 374,721 4.6 404,677 8.0 (% of total budget) 24.0 24.4 - Principal repayment 55,491 28.5 45,776-17.5 (% of total budget) 3.5 2.8 2. Receipts 1,566,200 15.2 1,660,000 6.0 (% of GDP) 18.6 18.3 - Revenues 1,420,000 4.4 1,495,000 5.3 - Domestic borrowing 146,200 100 165,000 12.9 3. Gross Domestic Products 8,399,000 7.5 9,070,920 8.0 Source : Budget in brief FY 2007-2008, Bureau of the Budget 26
Fiscal Sustainability Framework Debt/GDP (%) Debt Service/Budget (%) First year of running budget surplus policy Capital Expenditures to Total Budget Nov. 01 65 16 2009 - Fiscalization of FIDF2 Bond (Jun. 02) 60 16 2008 - Apr. 04 50 15 2005 25 Current 50 15-25 27
Macro Economic Assumption Real economic growth rate will 5.0 percent in year 2008-2011. 2011. Inflation rate 2.5 percent in year 2008-2011. 2011. Interest rate to finance budget deficit 5% in FY 2007-2011. 2011. 28
Forecast Fiscal sustainability framework FY 2007-2011 2011 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Public Debt/GDP Ratio 41.5 41.7 40.6 38.9 37.1 Debt Service/Budget 11.3 10.5 8.9 8.0 7.3 Capital Expenditures to Total Budget 24.0 24.4 26.7 26.8 26.8 Source : Fiscal Policy Office 29
Cash Balance 50,000 Million baht % 1.00 0 0.00 (50,000) (1.00) (100,000) (150,000) (2.00) (200,000) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 FY Cash Balance Cash Balance/GDP (FY) (%) (3.00) 30
Primary Balance and Debt/GDP Ratio 200,000 million baht 3.0 70 150,000 100,000 50,000 2.5 2.0 1.5 1.0 0.5 60 50 40 % 30 57.8 57.2 55.1 50.6 Debt/GDP Ratio 49.3 47.3 41.4 41.5 41.7 40.5 38.9 37.1 0 (50,000) (100,000) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Primary Fiscal Balance Primary Fiscal Balance/ GDP (FY) (%) 0.0 (0.5) (1.0) (1.5) 20 10 0 GDP Growth 9.0 6.8 7.5 7.5 7.5 6.4 6.0 7.7 9.0 9.7 5 7.5 5 5 3.9 4.1 4 5 interest rate 5 5 5 5 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 31
Quasi-fiscal activities QFAs are carried out on behalf of the government by central bank, public financial institutions, and nonfinancial public enterprises In other word, the quasi fiscal is the method that has nature as fiscal policy, but the money doesn t t come from the budget. QFAs can have significant implications for public policy and the general government financial position, but these fiscal effects are not usually reflected in fiscal reports for the general government. 32
Thailand s s Quasi-fiscal activities The government has introduced quasi-fiscal activities through special financial institutions. For example, special financial institutions (SFIs( SFIs) providing loans to SMEs at below-market rates or poorly secured. SFIs guaranteed a loan to SMEs. SFIs providing subsidy lending to lower income people or particular groups to buy their houses. SFIs providing loans to lower income people to run their business with the poorly secured. 33
Outstanding QFAs In billion baht CY 2003 2004 2005 2006 Outstanding funding provided through quasi- fiscal activities 212 290 374 438 Percentage of GDP 3.6 4.5 5.3 5.6 Percentage of annual Budget 21.3 24.9 29.9 32.2 Gross Domestic Product 5,917 6,490 7,088 7,816 Annual Budget 1,000 1,164 1,250 1,360 Source : Fiscal Policy Office 34
Thai Government Fiscal Risk Matrix Liabilities Explicit (Government liability is recognized by law or contract) Implicit (A moral obligation of the government that mainly reflects public expectations and pressures by interest group) Direct (Obligation in any event) Contingent (obligation if a particular event occurs) 35
Direct Explicit Liabilities Sovereign borrowing (foreign and domestic loans contacted and securities issued by central government) Budgetary expenditures Expenditures legally binding in the long term (civil service salaries, civil service pensions) 36
Direct Implicit Liabilities Future benefits/payment of the Social Security Fund provide to numbers Future health care financing by National Health Security Office 37
Contingent Explicit Liabilities Government guarantees on borrowing/debt by SOEs and public entities Mega projects which central government may receive future burden (Airport Rail Link) State insurance schemes (deposit insurance, flood insurance, crop insurance) 38
Contingent Implicit Liabilities Default of SOEs,, public entity on non -guaranteed debt/obligations Support to Special Financial Institution for covering losses due to run quasi fiscal activities by the direction of government Default of central Bank on its obligations (Foreign exchange contracts, currency defense, BOP) Environmental recovery, disaster relief Obligations of FIDF and future recapitalization needs in the banking sector Losses, non-guaranteed obligations, arrears and deferred maintenance of SOEs (losses of State Railway of Thailand, deferred railway track rehabitation) Future possible commitments and obligations of sub-national government Liabilities of extra budgetary funds 39
Japanese Real GDP 1990-2006 6.0 5.0 percent 5.3 4.0 GDP in 1990s = 1.4 percent In 1994, 1998-1999 GDP had negative growth 3.0 3.3 2.8 2.8 2.7 2.0 1.9 1.6 1.5 1.9 2.2 1.0 1.0 0.0 0.2 0.2 0.3 (0.0) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 (1.0) (2.0) (3.0) (2.4) (2.1) Source : IMF 40
Economic Stimulate Packages Unit : trillion yen Package Announced Date Total Packages Packages /GDP Supplementary Budget 1992 August 10.7 2.3 2.5 1993 April 13.2 2.8 2.4 September 6.0 1.3 6.4 1994 February 15.3 3.2 2.2 1995 April 7.0 1.5 2.8 September 14.2 2.9 6 1997 January 6.0 1.2 - December 16 3.1-1998 April 16.7 3.4 5.1 November 27 5.4 8.5 1999 November 18 3.6 8.1 2000 October 11 5.8 Total 161.1 49.8 Source : Ho-Chul Lee, PRI, 2003 41
Tax Cutting Programs Unit : trillion yen Apr-93 Feb-94 Apr-98 Nov-98 Estimated size 0.2 5.9 4.6 6 Source : Ho-Chul Lee, PRI, 2003 42
Targets for advancing fiscal consolidation Phase II FY 2007 to early 2010s achieve a surplus in primary balance of central and local governments in FY 2011 Required amount : 16.5 trillion yen Expenditures reductions : 11.4-14.3 14.3 trillion yen the gap amount will be supplemented through tax reform Phase III (early 2010s to mid-2010s) Prevent a divergence in the ratio of debts to GDP and reduce the ratio in a stable manner Source: Budget Bureau, Ministry of Finance, Japan 43
Transition Scenario and expenditure cut by 14.3 trillion yen 0.5 144 0 2006 2007 2008 2009 2010 2011 142-0.5 140-1 Debt to GDP ratio 138 136-1.5 Nominal GDP growth rate -nominal interest rate (%) Primary surplus/deficit to GDP ratio Debt to GDP ratio 134-2 Source: Budget Bureau, Ministry of Finance, Japan 132 44
Outstanding QFAs Measures Financial Institutions In billion yen FY 2003 FY 2004 FY 2005 Loan to SMEs JASME 7,594 7,500 7,058.4 Small Business Credit Insurance Programs JASME 31,331.3 29,997.5 29,130.3 Special Insurance for Midsize Enterprises JASME 5.8 3.6 2.3 Source: JASME Annual Report 2005-2006 45
Comparison of fiscal policy and fiscal position Japan Employed fiscal deficit during recession and economic slowdown Issued JGBs and FILP Bonds Cut tax rate and tax revenues Run quasi-fiscal activities through SFIs Have targets for advancing fiscal consolidation Thailand Employed fiscal deficit during recession and economic slowdown Borrowed external loans to stimulate and revive economy Cut tax rate and tax revenues Run quasi-fiscal activities through SFIs Have fiscal sustainability framework 46
Comparison of fiscal policy and fiscal position Japan Have plan to achieve primary balance by FY 2011 Debt service ratio equal to 25.3 percent in FY 2007 Central and local government debt to GDP equal to 141.1 percent in FY 2007 Have fiscal councils to make recommendations about fiscal policy. Thailand Had plan to achieve fiscal balance within FY 2005 onwards but have been cancelled. Debt service ratio equal to 11.3 percent in FY 2007 Public debt to GDP ratio equal to 41.5 percent in FY 2007 Have Economic Committee to make recommendations about fiscal policy. 47
Challenges and Policies Implication for Thai Government Maintain sustained economic growth and economic stabilization Ensure fiscal sustainability framework Keep public debt declining trend Introduce limited deposit insurance to decrease contingent implicit liability Identify and analyze fiscal risks which are possible financial pressure on central government and include contingent explicit liabilities in government financial statement Avoid fiscal indiscipline by moving fiscal activities off budget Set up the fiscal councils to conduct fiscal policy 48