Getting its Fiscal Act Together
July 01, 2009
By Deyi Tan , Chetan Ahya | Singapore & Shweta Singh | India
Tracking Fiscal Policy Implementation
The departure in political climate from the relatively longer government life cycles of the 1980-2006 period has hindered Thailand's ability to deal with the current global recession. The political outlook in the country is likely to remain uncertain in the near term. We believe that any alpha in domestic demand recovery in a sub-par economic world will need to hinge on fiscal policy execution. While political issues have deterred fiscal implementation in the past, fiscal execution seems to have now improved in spite of a coalition government.
Specifically, government spending (12-month rolling sum, as a percentage of GDP) rose from a low of 16.2% in October 2008 to 19.4% in May 2009, the highest since data became available in September 2002. The improvement was driven by current expenditures, such as the disbursement of the first stimulus package, which is a mid-year supplementary budget consisting largely of handouts and subsidies. However, the improvement in capital expenditure has contributed to a lesser extent. Indeed, capex have been subject to delays, given difficulties with government set-ups and political changes. Capex has declined from 20.7% of F2006 total government expenditure to 17.5% in F2008.
What's Next? Second Stimulus Package and Increasing Hope for Capex Spend Pick-Up
Plans for a second stimulus package (2SP) of Bht1.4 trillion (~16% of GDP) are in the pipeline. The initial uncertainty with regard to the funding sources, given the fiscal deficit ceiling stipulated in the Public Debt Management Act, has been resolved to some extent. The Executive Decree and the Royal Act, which will allow the government to borrow up to Bht800 billion outside the usual fiscal deficit ceiling, had been put forward for parliamentary approval. The Executive Decree, which allows for the first tranche of Bht400 billion in extra borrowing, was recently approved by both the Lower House and the Senate. The second funding tranche of Bht400 billion under the Royal Act was passed by the Lower House but will still need to be deliberated on by the Senate, likely in August. As a result, we now see a higher possibility of an increase in government spending, particularly on the capex front.
Second Stimulus Package: Questions and Answers
With this in mind, we address a few key questions surrounding the 2SP to understand the extent of government spending delta that could be expected.
How much is the incremental spending? Several ASEAN economies such as Malaysia and Singapore have also announced large stimulus packages to the tune of RM60 billion (~9% of GDP) and S$20.5 billion (~8.2% of GDP), respectively, but the new incremental spending is typically less than what the headline suggests. Similarly for Thailand's Bht1.4 trillion second stimulus package, about Bht700 billion (~8% of GDP) is ‘extra-budgetary' (financed by extra borrowings from the Executive Decree and Royal Act) and new money. The remainder is to be financed via regular budget financing of the central government, retained earnings of state-owned enterprises and private-public partnerships. To the extent to which the remaining amount is mostly financed through regular budgeting and the deficit ceiling is mandated at 20% of expenditure and 80% of principal repayment, we suspect there is a limit as to how much this really counts as incremental spending (i.e., an increase in government expenditure as percentage of GDP).
In which areas will the expenditures be concentrated and what is the likely timeline? The second stimulus package is mostly capex. In terms of sectors, the expenditures are concentrated primarily in transportation (40%), water management (17%) and energy (14%). With regard to the timeline for the Bht700 billion in new money, the Executive Decree and the Royal Act for the Bht800 billion additional funding have clauses that require the spending to be disbursed by December of 2010 and 2011, respectively. This would provide an impetus for spending to be expedited, in our view. Specifically, out of the Bht700 billion new money, about Bht20 billion is likely to be disbursed between August and October F2009. Bht269 billion is scheduled for F2010, and a further Bht207 billion and Bht208 billion are scheduled for F2011 and F2012, respectively.
How vulnerable is implementation to delays and political conditions? Implementation has been the missing link in fiscal policy so far, in our view. To speed up disbursement, shovel-ready projects (or the so-called Tier 1 projects that are ready to be implemented) account for Bht1.1 billion of the Bht1.4 trillion package. In terms of approval procedures, we understand that the process has been shifted from the cabinet committee level to a special committee at the Ministry of Finance (headed by the permanent secretary). To a certain extent, this could reduce the vulnerability of the approval process to political volatility. Moreover, we understand that Bht200 billion worth of shovel-ready projects have already been approved and can be kick-started soon. Yet, as we highlighted previously, a part of the 2SP still needs to be financed by the regular budget. This will require parliamentary approval and will continue to be vulnerable to political conditions, in our view.
Is funding an issue? The Ministry of Finance expects public debt to increase from the current 41% of GDP to a peak of around 58-61% by 2013. This would imply net debt issuance of about 5% of GDP on average each year. Indeed, as it is, the government is looking to tap directly into the retail market through its issuance of Bht50 billion of government savings bonds in July. With the current account surplus (four-quarter trailing sum) standing at 2.2% of GDP in 1Q09, the economy has some excess savings. Surplus domestic liquidity conditions will be able to accommodate the increase in government leverage, but only to a certain extent, in our view. A yield curve steepening will be likely.
Bottom Line: Government Spending to Offer Some Domestic Demand Alpha
High-frequency domestic demand indicators are still registering mixed trends. On one hand, indicators such as passenger car sales (-18.3%Y in May 2009 versus +4.2%Y in April 2009), intermediate and raw goods imports (-34.2%Y versus -29.6%Y), VAT revenue collection (-20.0%Y versus -19.4%Y) and consumer confidence (64.3 versus 65.1) are still in freefall. Yet, some markers such as commercial vehicle sales (-31.1%Y versus -39.7%Y) and manufacturing (-9.7%Y in April 2009 versus -14.9%Y in March 2009) are showing marginally less-bad declines. Going forward, Bht200 billion worth of new money in approved shovel-ready projects are in the immediate pipeline, with Bht20 billion likely to be disbursed between August and October 2009, and the rest slated for F2010 starting in October 2009. As a result, we believe that government expenditure could offer some alpha to domestic demand momentum, and we expect to see the domestic demand trajectory turning around more evidently in 2H09.
Important Disclosure Information at the end of this Forum
Rise in Asset Prices: New Challenge for Asian Central Banks
July 01, 2009
By Chetan Ahya | Singapore, Qing Wang & Sharon Lam | Hong Kong
Quick Rebound in Asset Prices Across the Region
The aggressive global policy response to defend against the slowdown has begun to gain traction, as real economic data have shown a slight improvement almost synchronously around the world. These attempts to revive growth have also resulted in a significant rise in asset markets, particularly property prices. Property markets have seen a meaningful rebound from the bottom across the Asia ex-Japan (AXJ) region, particularly in the financial centers of Hong Kong, Singapore, Seoul, Shanghai, Bangkok and Mumbai. From what we can surmise, property prices have risen by 10-40% in various pockets in the region (unfortunately, most up-to-date official national and city level property indices are not available). Hong Kong and Singapore, which are linked more closely to global financial markets, have seen the sharpest rebound. Price indices in some areas are close to the peak levels seen prior to the emergence of the global credit turmoil. Transaction volumes for the property sector have also increased significantly.
The most surprising trend can be seen in Singapore. Although Singapore is likely to suffer the worst recession in its history in 2009, property transactions are now close to their peak. During January-May 2009, total private residence transactions increased to 5,531 units (annualized run rate of ~13,247 units) versus the peak of 14,811 units in 2007.
Many Reasons for the Quick Rise in Property Prices
First, a sharp rebound in the stock market around the region appears to have increased the confidence of the locals. The MSCI Asia Ex-Japan Index (in USD terms) has risen by 71% from the trough following the global trend.
Second, excess liquidity in the system is rising. Central banks have cut rates aggressively in response to the global credit crunch, and the recent increase in capital inflows and trade surplus has added to this excess liquidity trend, as central banks appear reluctant to allow local currency appreciation in view of the still-weak external outlook. As a result, foreign exchange reserves in AXJ excluding China increased to US$1,446 billion as of May 2009 and are now close to their peak level of US$1,491 billion in April 2008. China's foreign exchange reserves have also risen back to an all-time high of US$1,954 billion in March 2009 after declining to US$1,880 billion in October 2008. Banks have cut mortgage lending rates aggressively. Average short-term rates have declined to unusually low levels at 2% on account of the aggressive monetary policy response. M1 growth in the region accelerated to 14.9% in April 2009 from a 6.6% trough in November 2008.
Third, most countries in the region are implementing a fiscal spending plan of 3-5% of GDP, which has supported growth and employment.
Fourth, most countries in the region also initiated measures to boost property demand during 4Q08 (e.g., Hong Kong, China, India and Korea). These measures included lowering the down-payment for getting a mortgage loan or relaxing lending norms for property and mortgages.
Central Banks Already Voicing Some Concern
What has been the central banks' response so far? Some have started to relay their concerns on asset prices. Last week a member of the Bank of Korea (BoK) board indicated that funds may be moving into stock and property. The board member commented, "Rising property prices may cause market instability". Similarly, a few days back, BoK Governor Lee Seong-tae mentioned that the BoK "also has to pay attention to the possibility of rising international raw materials prices hurting (domestic) price stability or for a rapid increase in short-term liquidity causing instability in real estate and other asset prices". Indeed, the governor of Korea's financial supervisory service (FSS) has already advised banks to maintain restraint when growing home-backed lending. A Chinese banking sector regulator recently vowed to monitor closely banks' lending behavior with a view to preventing allocation of bank lending to stock market and property. India's central bank governor also, for the first time since the credit crunch unfolded last year, mentioned that the RBI would consider reversing its expansionary monetary policy, but he did not indicate any timing on such a reversal.
End of Monetary Easing, but Rate Hikes Are Some Time Away
To be sure, the national level of property prices in countries other than city states has not risen as sharply to justify the aggressive policy response. Any potential correction in the global risk markets could also reduce the pressure of asset price rises. However, considering the pace at which property prices have moved up in certain pockets of the region, it does raise the risk of broader national-level price rises. The challenge for the central banks arises from the fact that the export and IP growth trend remains below potential and has not yet recovered meaningfully. AXJ IP is estimated to have improved to 1.6% in April 2009 from the trough of -7.6% in January 2009. However, it remains below the prior trough that occurred in 2001. Similarly, while exports are declining at a slower rate, they remain weak.
Selective Controls May Be More Likely as a Response
The key question is, if property prices continue to rise in the near term across the region, what would be the likely policy response? We are currently expecting central banks to start raising policy rates in 1Q10 as the growth trend recovers further. Our global economics team expects G10 growth to follow a slow recovery path, starting in 2H09. In this environment, any concerns about asset prices in the next six months could be addressed by sector-specific measures, such as tightening lending standards for the property sector and/or other non-monetary policy measures.
What Could Be the Specific Policy Response in the Region if Property Prices Were to Continue Rising?
Next, we highlight what we believe might be the policy response from the government in various countries.
China: Despite the recent rebound in property prices, there is not a nationwide property price bubble in China, in our view (see China Economics: Property Sector Recovery Is for Real, May 15, 2009). Moreover, the recent recovery initially in sales and more recently in prices is broadly in line with the policy objective, which is to make real estate investment a new growth engine to help offset weak industrial investment. To this end, a stable policy environment is critical. Looking ahead, we expect the authorities' current policy stance vis-à-vis the property sector to remain broadly unchanged. In fact, we view the policy change to revive the property sector since October 2008 as policy normalization, rather than discretionary, countercyclical policy easing.
The monetary and fiscal policy stance will hinge on macro developments. We expect the central bank to maintain the current accommodative policy stance for the remainder of the year. We continue to expect further normalization in loan creation each month, but this should not be interpreted as policy tightening. We also expect the base lending and deposit rates to remain unchanged through end-2009. Meanwhile, we do not expect additional fiscal policy stimulus of any meaningful size for the remainder of the year.
The authorities' current property sector policy approach features two tracks: 1) encouraging market-based commercial housing by removing unduly austere policy measures that artificially depress its development; and 2) addressing the housing issue for low-income households by developing the low-cost, low-rent, affordable housing program financed by public funds. This is an effective and sustainable policy approach, as a viable economic housing program is predicated on a buoyant commercial housing program, in our view. In view of the property sector's importance in supporting an economic recovery and sustainable growth, any concern that a policy shift might potentially hurt this sector is unwarranted, in our view.
That said, the Chinese authorities might decide to reinforce existing rules regarding bank lending to property developers and home buyers, down-payment requirements, mortgage interest rate discount for the first mortgage, and so on in regions where the local property prices are deemed to have risen excessively fast. Any reinforcement by the authorities would be done with a view to preventing abuse of these rules and a local property price bubble from developing.
India: In India, although property prices are yet to stabilize, anecdotal evidence suggests that property prices have started rising back from the bottom in many pockets after having corrected by 20-30%. The problem in India is not as much the rebound but the fact that property prices had run up by 100-300% across top cities over a period of four years before the credit turmoil unfolded. Hence, the RBI remains vigilant on asset prices. Although the RBI has not officially made any statement directly reflecting concerns about asset prices, the RBI governor recently mentioned the need to consider reversing the easy monetary policy without indicating any timeframe for such a move. In our view, if asset prices rise significantly, the RBI may initiate measures to tighten lending to the property sector and also to start sterilizing excess liquidity from the banking system. In this regard, its first step would be to start issuing monetary stabilization scheme (MSS) bonds, and the second step could be to hike the cash reserve ratio (CRR). However, given the underlying weak export and industrial production trends so far, we do not expect policy rate hikes before 1Q10.
Hong Kong: Our Hong Kong economist, Denise Yam, believes that the government is unlikely to intervene on property prices. The government may make more land available on the application list for property developers to trigger auction, while the HKMA may reiterate the guidelines on property lending, i.e., 1) remind banks to be prudent with mortgage lending and reinforce the guideline of mortgage payments at no more than 50% of household income; and 2) reinforce the 70% LTV ratio.
Korea: Korea's property markets are facing different issues inside and outside Seoul. Due to the limited supply of land within Seoul, the property market there is more demand-driven, which is a function of liquidity conditions and sentiment. Property prices in Seoul corrected quickly during the credit crunch in 4Q08, but anecdotal evidence from industry experts and news articles suggest that prices in Gangnam have already rebounded 20% from the trough (although the official data say 2%). According to the Ministry of Land, Transport and Marine Affairs, sales of luxury apartments doubled in January-April compared to a year ago. However, in the provincial areas outside Seoul, land is abundant and home supply has sky-rocketed in recent years, causing record-high inventory problems.
In our view, a single monetary policy cannot be applied to the entire country because of the differences inside and outside Seoul. Indeed, we do not expect the BoK to raise interest rates any time soon simply because property prices in Seoul have rebounded from the trough. BoK officials have been making more comments recently on the need to closely monitor asset price development. Some regard these comments as hawkish, but we view these as inflation anchoring by setting the expectation that the central bank will not allow asset prices to swirl out of control. After all, Korea's liquidity condition is not excessive, with M1 at 34% of GDP, while the private sector debt burden remains high, and so we believe that the BoK cannot afford to tighten soon.
In order to deal with the different regional problems, administrative policies targeted at specific areas will be more effective. With asset prices in Seoul showing signs of rebounding, we believe that property market deregulation in speculative zones (which are mostly in Seoul) will slow or take a break. The restrictions on loan-to-income and debt-to-income ratios could be kept intact for the time being. On the other hand, we expect the government to continue to introduce more incentive programs to attract purchases of provincial property or simply use more public funds to buy the unsold apartments there directly.
Singapore: Our Singapore economist, Deyi Tan, believes that given government authorities' modus operandi in the past, intervention in such initial phases of improvement appears unlikely. Nonetheless, both price levels as well as the pace of change will remain key factors to watch. If asset prices rise further in a rapid manner in the near term, the authorities could resort to supply-side and/or demand-side measures. Compared with supply-side measures, demand-side ones tend to have more severe effects on sentiment. For example, measures like capital gains tax are most draconian relative to others such as lowering the loan-to-value ratio and increasing the minimum down-payment/cash down-payment component. Supply-side measures would include instruments such as reducing the number of land-sites on the reserve list or reducing the time period for project completion.
Historically, the authorities have handled each property cycle in ways different from the past. In the 1998 cycle, the property market was kept in check using anti-speculation demand-side measures, which eventually pricked the real estate bubble. In the 2007-08 cycle, passive demand-side measures such as the removal of the existing deferred payment scheme were used but to a lesser extent compared to supply-side measures. In our view, if the government perceives a further rise in property prices as speculative, we suspect that the government may initiate demand-side measures to rein in the real estate market rather than supply-side ones.
Taiwan: Liquidity is abundant in Taiwan, with M1B at 73% of GDP, and if not controlled carefully, it could easily fuel an asset bubble, in our view. Demand for property heightened this year when mortgage rates dropped below rental yields. The continual trend of repatriation of Taiwanese overseas capital back home is a further contributor to liquidity. On the supply side, the dramatic cutback in presale cases has also helped to support prices. Sentiment revival is also an evident factor supporting asset prices in Taiwan recently. Anecdotal evidence suggests that property prices have grown faster in 2Q09 as compared to 1Q09, which we attribute mostly to the sentiment revival on the back of significantly closer economic dialogue between Taiwan and Mainland China starting at end-April. Speculation on the deregulation of property purchase by Mainland Chinese investors is among the hot topics in bolstering property investment confidence in Taiwan. According to financial daily Commercial Times, transactions of luxury homes in Taipei jumped by almost 20%M in May.
Unlike the BoK, the CBC in Taiwan has not been making frequent comments on asset prices. Even in its latest statement following the rate freeze decision at its 2Q monetary policy meeting, the CBC did not mention asset prices and also commented that overall price level in Taiwan will remain stable. We therefore believe that the CBC will keep an accommodative policy stance by keeping its policy rate unchanged at a historical low of 1.25% for the rest of this year. It is difficult for the CBC to justify a rate hike with a record-high jobless rate and negative CPI growth. Neither the government nor the media in Taiwan appears concerned about asset price growth; thus, we believe that the likelihood of anti-speculative measures is rather unlikely in the near term. After all, the opening up of the economy and stricter regulations are opposing policies that can confuse the public and hurt the administration's popularity. Nonetheless, we continue to see strong upside for Taiwan's asset prices due to liquidity and cross-strait business opportunities, and so - if asset prices maintain their current pace of growth - more administrative policies could be seen in 2010, such as a higher down-payment requirement for presale cases.
Important Disclosure Information at the end of this Forum
Disclosure Statement
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. and their affiliates (collectively, "Morgan Stanley").
Global Research Conflict Management Policy
Morgan Stanley Research observes our conflict management policy, available at www.morganstanley.com/institutional/research/conflictpolicies.
Important Disclosure for Morgan Stanley Smith Barney LLC Customers
The subject matter in this Morgan Stanley report may also be covered in a similar report from Citigroup Global Markets Inc. Ask your Financial Advisor or use Research Center to view any reports in addition to this report.
Important Disclosures
Morgan Stanley Research does not provide individually tailored investment advice. It has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages them to seek a financial adviser's advice. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. Morgan Stanley Research is not an offer to buy or sell any security or to participate in any trading strategy. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.
With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we do not represent that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a company. Facts and views in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
To our readers in Taiwan: Morgan Stanley Research is distributed by Morgan Stanley Taiwan Limited; it may not be distributed to or quoted or used by the public media without the express written consent of Morgan Stanley. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong; if you have any queries concerning it, contact our Hong Kong sales representatives.
Morgan Stanley Research is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin);in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, supervised by the Spanish Securities Markets Commission(CNMV), which states that it is written and distributed in accordance with rules of conduct for financial research under Spanish regulations; in the US by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research it has prepared, and approves solely for purposes of section 21 of the Financial Services and Markets Act 2000, research prepared by any affiliates. Private UK investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.
Trademarks and service marks in Morgan Stanley Research are their owners' property. Third-party data providers make no warranties or representations of the accuracy, completeness, or timeliness of their data and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request.
The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client.
The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.
As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.
|
![](/img/clear.gif"){kind=spacer}