Ranking Asia-Pacific’s finance ministers is designed to provide moral support to the success stories – and to give a nudge to those who could do better, or at least prompt discussion among their constituency.
They have a difficult task ahead of them in 2015. Governments across the Asia-Pacific region are faced with a mountain of debt, weak demographics and the onset of deflationary pressure.
States have not deleveraged since the 2008 global financial crisis as many had promised. As the outlook for economic growth darkens, fiscal discipline will become even harder to enforce politically.
Global debt has risen by $57 trillion since 2007 to $199 trillion, according to consultancy McKinsey. To be sure, debt is a key arrow in governments’ quiver to boost demand and in emerging economies often reflects deeper financial markets.
Morgan Stanley’s research on Asia’s debt indulgence shows the region’s debt to GDP ratio climbed to 205% in 2014, the seventh consecutive year of growth.
Clearly, finance ministers’ debt management needs improvement if the world is to avoid another crisis and painful deleveraging down the road. Policies should be expanded to include say more privatisations.
Add to the pressure the unfolding commodity bust and finance ministers have their work cut out this year.
To aid the policy debate, FinanceAsia has ranked the region’s finance ministers according to how they have positioned their countries to face the challenges ahead.
With the help of many analysts, investors and bankers, whom we kept anonymous, our team weighed each minister’s contribution to the budget and fiscal policy; use and development of capital markets; where applicable, structural reforms and regulation; investor perceptions; and that most intangible of things, independence.
The winner of this year’s finance minister of the year award is the Philippines’ Cesar Purisima, one of the few who delivered in 2014. Purisima collected his award at our annual Achievement Awards dinner on February 4.
1) Cesar Purisima — The Philippines
It takes a confident finance minister to complain after seeing his country bumped up to investment grade by Moody’s, Standard & Poor’s and Fitch.
That’s in keeping with Cesar Purisima, head of the department (not ministry) of finance, described by bankers as a bulldog who revels in challenging orthodoxy and tweaking the noses of the powerful – notably the US Federal Reserve and the big-three credit rating agencies.
Those same agencies upgraded the Philippines to investment grade in 2013, three years after Purisima had assumed the top job in the finance department. He is a credible critic because of his achievements.
During his tenure, the country’s economic growth rate has fluctuated from a high of 7.6% to a low of 3.7%. In 2014 it is estimated to be around 5.7% and in the next two years looks set to rise above 6% again – choppy, but a welcome change after many years of stagnation.
What’s more, the Philippines government’s debt-to-GDP ratio is at its lowest level for at least 15 years, according to the Bureau of the Treasury.
So is this the result of fortuitous timing or savvy management?
Purisima was certainly dealt a decent hand by positive economic trends when he took office, including a global investor flight to emerging markets following the West’s financial crisis. Like his predecessor Margarito Teves, he also benefited from powerful remittance flows from Filipino workers based overseas.
But he has also worked very hard to put his and his country’s message across to international investors, and they have reciprocated by helping to lift the Philippine stock market by 125% since he took office.
Purisima has tapped bond markets in timely fashion and secured favourable borrowing rates. Already this year the Philippines has raised $2 billion through a 25-year bond on decent terms, the first sovereign issue of 2015. The order book totalled $13.5 billion, suggesting investors are still buying heavily into the country’s continued growth story.
In terms of generating revenue, he should be given credit for pushing through the controversial reform of the country’s sin taxes in 2012, levying a special duty on tobacco and alcohol despite intense lobbying by vested interests.
Criticism of Purisima centres on the disbursement of the funds raised by the government. Even the IMF trimmed its latest growth estimate out of concern that spending wasn’t happening or was going to waste. If Purisima is to maintain his reputation for boldness and sticking to his guns – and if he is to be FinanceAsia’s Finance Minister of the Year again – this is where he needs to take aim.
2) Bambang Brodjonegoro — IndonesiaBambang Brodjonegoro has only been in the job since November but has already dealt with one political hot potato with aplomb, the controversial cutting of Indonesia’s fuel subsidy.
That the cut was so large – the gasoline subsidy was effectively cut to zero – and has passed off without compromising social order is of course a testament to Joko Widodo but also his new finance minister. The move should save $8 billion from government spending.
Having served as vice-minister of finance under President Susilo Bambang Yudhoyono, he was at the heart of discussions as to the size and timing of the cut.
Bambang inherits a slowing economy and an energy sector whiplashed by falling commodity prices but Indonesia’s debt-to-GDP has also been falling, while another of Bambang’s early moves was to tap global bond markets for $4 billion before US ‘taper talk’ could return to dominate investor perceptions of emerging markets.
The quick actions of the finance ministry have provided the government with much-needed cash to put toward infrastructure spending. This year’s budget for infrastructure is $23 billion, far from the estimated $455 billion needed over the next five years. It will be up to Bambang to lure enough private capital to make up the rest.
3) Choi Kyung-hwan — Republic of Korea
Financial industry practitioners view Choi Kyung-hwan as an active and hands-on minister, but not a radical: his reforms are small-bore in the tradition of most recent Korean finance ministers, with a prudence-first approach.
Investors appreciate that, which is one reason why prices for Korean government bonds have remained stable. Choi entered office last year with a mandate to boost smaller companies, which too often seem to flounder in the wake of the massive chaebols.
He has used tax cuts to provide incentives for smaller companies to hire people, and introduced a tax on retained earnings, to prod big companies to stop hoarding cash; the latter is an attempt to address Korea’s over reliance on exports.
Choi’s bigger impact is likely to be reforming Korea’s public pensions, which need to be put on longer-term, sustainable footings if the country is to provide financial security to an ageing population without risking insolvency.
The government has struggled to find revenues to fund social security without raising taxes or borrowing from abroad. Therefore Choi is implementing delays to the age at which public servants receive benefits, and is raising employee contribution levels.
4) Chang Sheng-ford — TaiwanChang Sheng-ford wins awards for his pushing ahead with tax reforms under huge pressure from public opinion.
Chang, who came to power in June 2012, has proposed a government fiscal restructuring program to maintain Taiwan’s fiscal health. The government’s debt-to-GDP ratio was 38.6% in fiscal year 2014, which is relatively high by the country’s standards and very close to the legal limit of 40.6%.
So Chang decided to increase taxes to make up the shortfall. He hiked the business taxes imposed on banking and insurance industries from 2% to 5%. He also slashed the amount of surtax paid by a company that could be used as a credit against withholding tax on dividends distributed to non-resident shareholders, and changed the basis for calculating capital gains tax on property to actual market prices rather than, much lower, locally assessed values.
As a result, improvements are baked into Taiwan’s 2015 budget. Compared with last year, total government revenues are projected to grow by 5.4% to NT$1.799 trillion ($60 billion), according to the Directorate-General of Budget, Accounting and Statistics. The nation’s debt-to-GDP ratio is projected to decline by 0.1 percentage point.
The government’s fiscal restructuring program is also expected to bring in an additional NT$17.5 billion from taxation while trimming more than NT$30 billion off expenditures.
5) Lou Jiwei — China
In the Chinese system, the finance minister is constrained compared to his peers abroad, but Lou Jiwei has made an impact by keeping the central government budget under control and driving bond market reforms.
But these positives must be weighed against the uphill road the ministry must travel: China’s fiscal revenue growth fell below 10% for the first time in a decade last year, while the budget deficit rose by 12.5% to $221 billion. On paper the central government’s debt and deficits are well within reasonable limits, but this masks deeper frailties.
Out-of-control borrowing at local levels (often in the name of the central government); corruption; antiquated tax collection; and a shadow-banking system that obscures accountability all pose challenges to the ministry. For example, analysts suggest as much as Rmb12 trillion ($1.9 trillion) of local debt in the shadow-banking system is at risk of default.
Lou’s response, in sync with President Xi Jinping’s dual emphasis on fighting corruption and paying homage to the nation’s written constitution, is to make revenue generation more transparent, and fiscal policy more flexible.
This involves reducing local governments’ reliance on real estate to raise income, shifting taxes more to personal and corporate incomes, and preventing localities from borrowing in the central government’s name. Can Lou fight these fires and keep Beijing’s books in the black?
6) Arun Jaitley — India
Arun Jaitley only became finance minister last May, in circumstances similar to Indonesia.
Unlike Bambang Brodjonegoro, his equivalent in Jakarta who also has not been in the job long, Jaitley has not enjoyed the freedom to make bold moves. However, he is making the right pledges within a more complicated administration.
Notably he has played a big role in reversing investor attitudes toward India: a year ago, markets focused on India’s rising inflation, stagnating growth and rising external deficit of 7% of GDP.
Under Jaitley, India has a fiscal deficit target of 4.1% of GDP and a roadmap to get that ratio below 3% in the coming years.
Unlike the previous administration, investors believe Jaitley has a credible plan to actually achieve such targets. That belief will be tested when he presents his budget on February 28.
Can he deliver the introduction of a national goods and services tax, reduce fuel subsidies and streamline regulation of industry, while still winning the backing of other parties in parliament?
7) Tharman Shanmugaratnam — Singapore
Singapore is at a tipping point. For the last decade, the Lion City was focused on increasing its rate of economic growth and positioning itself as a financial centre. It has succeeded. Most people own their own home, thanks to sensible government housing policies; the city is a vibrant hub for wealth management, tourism and healthcare; and its infrastructure and governance is first rate.
But the shift to empowering households and consumers, while growth slows, the population ages and foreigners become an outsized portion of the workforce (whether blue or white collar) are putting new strains on social cohesion.
That in turn presents new challenges to the finance ministry. Tharman Shanmugaratnam has long been part of the government’s inner circle. On February 23 he will present a budget unlike any before, with a proposal for universal healthcare at its heart.
Singapore has actually been here before, having set up a national pension system in the 1950s, which still finances its sovereign wealth funds and strategic investments. But instead of saving, now it’s spending – at a time of markedly slower economic growth and immigration creating flashpoints over employment and inequality.
While no single budget can plausibly solve a country’s challenges, Shanmugaratnam’s will have to make a credible start.
8) Najib Razak — Malaysia
The tanking of crude oil prices to below $50 a barrel threatens Malaysia’s economy, not least because its budget for 2015 was drawn up when the oil price was above $100.
In the wake of the plunge, it sometimes seemed finance minister Najib Razak, who also happens to be the nation’s prime minister, was nowhere to be seen. That is, until January 20, when he finally revised the budget to account for the change.
Some economists, say it’s too late, noting heavy capital outflows from the market and a vulnerable ringgit.
Another issue is that state investment fund 1MDB, whose chairman is Najib, missed a third loan repayment deadline. This has fueled concerns that the government would have to bailout the company, inflating the country’s massive public debt to beyond 55% of GDP.
Overall his track record as finance minister has been positive. Since coming into office in 2009 he has halved Malaysia’s fiscal deficit to a targeted 3.5% in 2014 and reduced the nation’s heavy dependence on oil exports.
Although his economic management can be too dirigist, Najib is putting money into important infrastructure efforts and is proactive in trying to create new-economy jobs.
He is finally presenting budgets with realistic projections for oil prices and so far investors accept his premises.
9) Joe Hockey — AustraliaHockey in particular has come off as a whinger instead of as a leader. Communication miscues made his first budget in 2012 a non-starter, deemed miserly to an electorate not primed for austerity. Australian finances aren’t terrible – it’s a stable, AAA-rated country – but considering the country is emerging from a two-decades commodity boom, that it has already slipped into a budget deficit is worrying. Howard and Costello failed to save for a rainy day, while recent Labour governments overindulged in social programmes. Hockey became treasurer in the midst of a rapidly falling terms of trade, which has hurt revenues – and his projections have failed to keep pace with markets.
Hockey’s next budget, due in May, will make or break him. He must be realistic about Australia’s terms of trade, and replace tinkering with boldness: orient taxes away from personal income in favour of widening a national goods and services tax, close loopholes and cut spending. Even if the agenda doesn’t get through an unruly Senate, an articulated vision at least sets Abbott up for a 2016 election and a solid mandate. Hockey must spend his dwindling political capital on this task lest he find himself missing from Abbott’s side in the next election.
10) John Tsang Chun-wah — Hong Kong
Financial secretary John Tsang Chun-wah fears Hong Kong’s fiscal reserves would be depleted in 20 years, now that Chief Executive Leung Chun-ying has pledged up to HK$20 billion per year to help alleviate poverty. But HK$20 billion is a drop in the bucket given Hong Kong’s HK$1.4 trillion in fiscal reserves, modest levels of government debt and consistent cash surpluses.
Markets favour governments that are conservative and prudent, but Tsang’s caution is extreme. While spending continues to go to infrastructure boondoggles that benefit well connected developers, the government is miserly toward its old, its sick, and its poor. This is increasingly untenable given the runaway prices in real estate that have priced much of the middle class out of ownership.
Hong Kong’s current fiscal stability ignores the lack of progress in shifting fiscal policy to address the pressures of an ageing population on housing, healthcare or savings. It is 15 years since the Mandatory Provident Fund emerged; since then the government has lacked any sort of vision. The best the government can offer are market-unfriendly measures against foreign property owners and a promise to expand public housing, without addressing the underlying causes of inflation and inequality.
11) Sommai Phasee — Thailand
Sommai Phasee, Thailand’s finance minister, only assumed his current role in August 2014, following the military coup. He is no newcomer, though, having previously served as a deputy finance minister following another coup in the 2006.
The main challenge he faces is reviving Thailand’s flagging economy, which has reeled from the effects of the political instability that prevailed from the second half of 2013 up till the military coup in May. As a result of this, the government is projecting GDP growth in 2014 of just 1%, while exports, tourism and domestic consumption sag.
Ironically the priority of the new government has been to continue doling out subsidies to rice farmers, continuing the same ruinous policy for which the military ostensibly ousted Yingluck Shinawatra from the prime minister’s office. The 2015 budget will slash payments to villages but it’s likely the government will continue paying off farmers to ensure political quiet.
The government therefore must shore up revenues, particularly as exports weaken. Weakening the baht is anathema, so the main idea pitched by the new government is an inheritance tax. On paper this is a good idea, but implementation of such measures is difficult in transparent, clean countries such as Canada or New Zealand. Making it work fairly in Thailand is quite a task.
The 2015 budget is mildly stimulative but hardly Keynesian. So far measures that could restore finances, improve competitiveness and restore consumer confidence are unlikely to be tried by the junta running the government.
12) Taro Aso — Japan
Japan’s Taro Aso rates lowly because he has presided over a weakening in fiscal discipline during his tenure.
December’s general election was in many ways a showdown between the elected government’s pro-growth policies known as Abenomics, after Prime Minister Shinzo Abe, and the finance ministry’s fiscally conservative bureaucrats. Fiscal discipline lost.
An early battleground was sales tax. Japan has delayed a sales tax hike to 10% by 18 months until April 2017. The Ministry of Finance estimates that the delay will deprive the government’s coffers of about ¥5 trillion in tax revenues from April 2016 to March 2017.
The move makes it almost impossible for the government to hit its target of reducing the primary budget deficit to 3.3% of GDP in 2015.
Aso also failed to resist plans to cut the corporate tax rate from April by 2.51 percentage points to 32.1%.
The tax cuts come at a time of record spending. The draft budget for April 2015 to March 2016, approved by the cabinet on January 14, projects expenditure of ¥96.3 trillion, up from ¥95.9 trillion a year earlier.
Japan’s debt-to-GDP ratio now stands at 245%, up from 184% at the end of 2008 and close to post-World War II levels when Japan defaulted on its debt. Urgent action is needed if the government is to achieve a primary surplus by fiscal 2020.
