i Develop Stocks Advisory

Increased fiscal deficit need of the hour... Asian governments are abandoning spending restraint and trying to get their consumers to do the same in their battle to overcome slowing growth. The Philippines may discard plans to balance its budget this year as President Gloria Arroyo's government accelerates investment in public works and social services. Thailand's government is spending 1.5 trillion baht ($47 billion) to expand mass transportation and improve health care. Hong Kong is cutting taxes, and Singapore is handing out cash to its citizens. Such policies, aimed at generating more demand at home to make up for slowing overseas sales, come with the encouragement of the International Monetary Fund, in a reversal of its long- standing push for fiscal restraint. Developing more self- sustaining domestic sources of growth may help Asia's emerging economies shift away from dependence on exports. ``There's been a long tradition of fiscal frugality in most Asian countries,'' says Hubert Neiss, the IMF's top official for the region during the 1997-98 financial crisis. ``However, at a time when global demand and exports are slowing down, it's important to boost domestic demand, consumption and investment. Asia can afford it.'' In developing Asian nations, the IMF predicts growth will decline to 8.6 percent in 2008 from an estimated 9.6 percent in each of the past two years. Dragged Down The region's economies, almost twice as reliant on overseas sales as the rest of the world, are being dragged down by weakness in the U.S., Japan and Europe, the markets for 60 percent of Asian shipments. Purchasing managers' indexes in China, Singapore, Hong Kong and India already indicate slowing manufacturing growth. ``We foresee a challenging time for Asia's export environment this year,'' says Tai Hui, Singapore-based head of Southeast Asian economic research at Standard Chartered Plc. The slowdown has been accompanied by accelerating inflation that limits the ability of Asian central banks to support growth with lower interest rates. In January, IMF Managing Director Dominique Strauss-Kahn urged governments to tackle the problem by easing tax and spending policies. That reversed the lender's traditional guidance in favor of smaller budget deficits. ``If you're concerned about inflation, then perhaps one way is to hold monetary policy fairly tight and target fiscal stimulus,'' says Bill Belchere, an economist at Macquarie Securities Ltd. in Hong Kong. ``Asia is listening.'' Ample Resources Some Asian countries have ample resources to employ fiscal measures as the region's expansion has enriched their treasuries in the aftermath of the 1997-98 financial crisis. A decade ago, Asia was reeling after currencies including the Thai baht and the Indonesian rupiah plummeted in value, leading to a wave of devaluations, bankruptcies and a flight of foreign capital. Support packages from the IMF came with conditions that forced countries to curb spending, prolonging their pain as they fell into recessions. Now, with property markets in Hong Kong booming, its government projects a record budget surplus of HK$115.6 billion ($14.9 billion) for the fiscal year ending March 31. Singapore estimates a S$6.4 billion ($4.6 billion) surplus for the same period, the highest in at least a decade. In India, tax collections have more than doubled since Prime Minister Manmohan Singh's government came to power in 2004. China's tax revenue climbed 31 percent in 2007. India's government proposes sharing the wealth by waiving 600 billion rupees ($15 billion) in agricultural loans for as many as 40 million farmers. Finance Minister Palaniappan Chidambaram also raised the income-tax exemption limit and cut excise duties on goods including drugs and small cars. Tax Breaks Hong Kong Financial Secretary John Tsang said last month the government will spend HK$33.9 billion to provide personal, corporate and real-estate tax breaks, subsidize electricity bills and abolish duties on wine and beer. Singapore plans to distribute S$2.8 billion in cash and tax rebates. Even China, whose growth reached a 13-year high in 2007, needs to increase domestic spending, says Neiss, now a senior Asia adviser for Deutsche Bank AG in Vienna. China's Premier Wen Jiabao said March 5 that the government will raise welfare payments to provide a shield from soaring food costs. China also plans to spend 31 percent more on agriculture in 2008, boosting rural incomes that are a third of those in the cities. ``Should exports seriously slow down in China, there's a good argument to change the pattern of demand from exports to domestic consumption,'' Neiss says. ``It will benefit the standards of living of the people and make their economy more resistant to adverse global influences.'' Unused Highways Pumping government cash into an economy to boost growth isn't risk-free. In the 1990s, the Japanese government's attempt to spend its way out of a recession left the nation with the world's biggest public debt and miles of little-used roads and bridges. Officials such as Singapore Finance Minister Tharman Shanmugaratnam have expressed concern that too much spending would only overheat their economies. Asian officials willing to take that chance have some company elsewhere. Mexico's government plans to increase public- works spending to counter its slowing economy. In the U.S., President George W. Bush has approved a stimulus package including tax rebates worth $168 billion. U.K. Chancellor of the Exchequer Alistair Darling said last month that fiscal policy will be aimed at stimulating growth rather than reducing the government's deficit. Both of Spain's main parties have pledged fiscal-stimulus packages. Limited Options Options are limited in the 15 nations that share the euro by a requirement that they hold their budget deficits below 3 percent of gross domestic product. The same constraints apply to the 10 new European Union members, most in eastern Europe, for them to qualify to convert to the euro. France is already forecast to run the largest deficit in the euro area next year, and weaker expansion may make it the first nation to test EU budget rules since they were revised in 2005. European finance ministers on Feb. 12 pressed France to hold to a promise to balance its budget by 2010. ``Asian governments are willing to stretch their budgets a bit more to lean against the headwinds because they have the money and the ability to spend,'' says Joseph Tan, an Asia strategist at Fortis Bank SA in Singapore. ``In Europe, they need to maintain fiscal adherence to keep the entire monetary system in order.'' `Vulnerabilities' Not all Asian nations can afford to boost their economies using tax and spending tools. Countries such as Sri Lanka and Malaysia ``have fiscal vulnerabilities right now,'' says Ping Chew, a managing director at Standard & Poor's in Singapore. ``If they try to do too much, to have the economy living off and dependent on the government, they run the risk'' of hurting credit standings they rebuilt after the currency crisis a decade ago. ``Asia has to be careful that the measures it's taking reflect the temporary phenomenon of slowing growth it's experiencing and that the fiscal stimulus doesn't become entrenched,'' Chew says.