Global Financial Crisis and ASEAN: Fiscal Policy Response in the Case of Thailand and Indonesia

• Published date: 01 December 2012
• DOI: http://doi.org/10.1111/j.1748-3131.2012.01241.x
• Author: M. Chatib Basri,Kanit Sangsubhan
• Date: 01 December 2012

Global Financial Crisis and ASEAN:

Fiscal Policy Response in the Case of

Thailand and Indonesia

Kanit SANGSUBHAN1† and M. Chatib BASRI2

1Fiscal Policy Research Institute and 2The University of Indonesia

Sound macroeconomic and financial fundamentals, plus quick and forceful fiscal policy responses

contributed to Thailand’s and Indonesia’s economic recovery in the aftermath of the global finan-

cial crisis. This paper reviews the impacts of the recent global financial crisis on the Thai and Indo-

nesian economies, and identifies the characteristics of the fiscal stimulus package in each economy

and their implications to counter the negative impact of the global financial crisis.

Key words: ASEAN, fiscal policy, fiscal sustainability, global financial crisis, Indonesia, Thailand

JEL codes: E62, H20, H30

1. Global Financial Crisis (GFC) and Its Impacts on Association of Southeast

Asian Nations (ASEAN)

In Asia, the debate about global imbalances between Asia and the USA was going on for

years before the financial crisis actually happened. The central issue of the debates was

whether the USA spent too much, or Asia saved too much, which, in turn, implied an

undervalued currency policy in Asia. Some experts and policy makers in Asia consis-

tently raised serious concerns over the massive imbalances in the real and financial

sectors over the years. Therefore, it seems Asia was prepared for the GFC before Septem-

ber 15, 2008, when Lehman Brothers went into bankruptcy.

In the case of the Association of Southeast Asian Nations (ASEAN), the major prepa-

ration to prevent a financial crisis was prudential policy in overseeing financial institu-

tions. In relation to the size of its capital, the ASEAN financial system invested only a

very small amount in subprime derivatives. Although the GFC did not shake ASEAN’s

financial foundations, its impact, however, hit ASEAN at the main growth engine – the

export sector, which generates income in all member countries. The impact varied from

country to country, but all ASEAN 10 countries,1except Myanmar perhaps, experienced

negative growth or were shaken by the economic slowdown. Thailand led the pack of

negative growth countries, followed by Brunei, Malaysia, and Singapore (see Table 1).

Cambodia experienced almost a no-growth situation in 2009, while Indonesia, Vietnam,

and Laos PDR were still able to maintain high rates of growth.

For all ASEAN members, the policy responses showed a similar pattern – pursuing

fiscal stimulus and immediately lowering interest rates. The data from Asian

†Correspondence: Kanit Sangsubhan, Fiscal Policy Research Institute, 118/1 Tipco Tower, 33rd

Floor, Rama VI Road, Bangkok 10400, Thailand. Email: kanit@fispri.org

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doi: 10.1111/j.1748-3131.2012.01241.x Asian Economic Policy Review (2012) 7, 248–269

© 2012 The Authors

Asian Economic Policy Review © 2012 Japan Center for Economic Research

248

Development Bank (ADB), depicted in Table 1, indicate the amount which each ASEAN

country moved to support growth by fiscal deficit policies. On the one hand, the eco-

nomic slowdown triggered falls in government revenue, that is, the auto-stabilizer, and,

on the other hand, the government increased spending to push domestic demand against

the shortfall of exports of goods and services. Vietnam generated rather large fiscal defi-

cits that measured 10.6% and 8.0% of gross domestic product (GDP) in 2009 and 2010,

respectively. Perhaps, the large fiscal deficits have helped prevent the Vietnamese

economy from experiencing an economic contraction. Similar toVietnam, other ASEAN

countries (except Myanmar) would have faced a deeper cut in GDP growth without the

fiscal stimulus packages.

It should be noted that the North East Asian countries introduced fiscal stimulus

policies with a more aggressive magnitude than ASEAN. The People’s Republic of China

introduced a fiscal stimulus with a size of 13% of GDP, Korea 2.8%, and Japan 2.4% (see

Table 2).As Asian countries are increasingly connected in terms of trade and investment,

the concerted fiscal stimulus at this high level would have a second round effect to rein-

force the import demands of each other. In the case of Thailand, the consolidated fiscal

stimulus of Asia generated an extra 0.9% and 0.3% of GDP growth in 2009 and 2010,

respectively. The same impact would apply to other Asian countries depending on the

degree of intra-trade within the Asian region of each Asian country.

2. Impacts of the 2008 GFC on the Thai and Indonesian Economies2

The global financial crisis in 2008 led to a decrease in the demand for Asian exports,

including Indonesia’s and Thailand’s exports. In comparison, however, the GFC had a

Tab le 1 GDP growth and fiscal balance in the ASEAN countries (2008–2010)

ASEAN-10

GDP growth (%) Central government deficit (%GDP)

2008 2009 2010 2008 2009 2010

Thailand 2.5 -2.3 7.8 -0.3 -4.7 -2.0

Brunei -1.9 -1.8 2.6 27.9 6.2 n.a.

Malaysia 4.6 -1.7 7.2 -4.8 -7.0 -5.6

Singapore 1.1 -0.8 14.5 0.1 -0.3 -0.1

Cambodia 6.7 0.1 5.8 -0.1 -6.3 -4.8

Philippines 3.8 1.1 7.6 -0.9 -3.7 -3.5

Indonesia 6.0 4.5 6.1 -0.1 -1.6 -0.7

Vietnam 6.2 5.3 6.8 -3.1 -10.6 -8.0

Laos PDR 7.8 7.6 7.9 -2.3 -3.4 -2.3

Myanmar 10.3 10.6 10.4 n.a. n.a. n.a.

Note: For the central government deficit, the data are for the fiscal yearof October to September.

Source: Asian Development Bank.

Kanit Sangsubhan and M. Chatib Basri Thailand and Indonesia Fiscal Responses

© 2012 The Authors

Asian Economic Policy Review © 2012 Japan Center for Economic Research 249