Fiscal Sustainability in Some ASEANCountries: Evidence from a Panel DataAnalysis
Nguyen Thi Thuy
Visiting Scholar
Policy Research Institute, Ministry of Finance, JapanDecember 11, 2018

Outline
Introduction
Theoretical Framework
Empirical Analysis
Conclusion and Policy Implications

Introduction

Motivation
Maintaining sustainable fiscal policy has been
increasingly important in the scope ofeconomists and policymakers.
There has been substantial growth in theliterature related to fiscal sustainability overthe past few years, especially after thefinancial crisis 2007-2008.

ASEAN Managing fiscal sustainability prospects is also among the key
macroeconomic management issues in the ASEAN countries.
 A unique characteristic of the ASEAN economies most badly
damaged by the Asian financial crisis of 1997-1998 was that
fiscal policies and public debt levels had been relatively soundleading up to the crisis.
 High and persistent fiscal deficits in ASEAN countries havebeen a matter of concern for policymakers and researchers.
 This study adds to the limited literature on fiscal sustainabilityin developing countries.

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
20152016
2017

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Cambodia

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

Budget deficit and Gov. debt for selected
countries (% GDP)
Lao

50
0.0
120
0.0

40
-2.0
100
-1.0

30
-4.0

20
-6.0

10
-8.0
20
-6.0

0
-10.0
0
-7.0

80
-2.0

60

-3.0

40

-4.0

-5.0

Malaysia
Vietnam

70
0.0
70
2.0

60
-1.0
60
1.0

50
-2.0
50
0.0

40
-3.0
40

30
-4.0
30

20-5.02010-6.0
10-5.00-7.0
0-6.0

-1.0

-2.0

-3.0-4.0

Key objective
To examine the sustainability of fiscal policy in aset of eight ASEAN countries covering the periodof 1989-2017 by applying stationarity andcointegration tests. Both the individual andpanel approaches in testing sustainability areapplied.

Theoretical Framework

The issues of fiscal sustainability
 Blanchard et al. (1990) define a sustainable fiscal policy as apolicy such that the debt-to-GNP ratio eventually converges
back towards its initial level after some excessive variation. In
other words, for a fiscal policy to be sustainable, after having
accumulated debt in the past, the government must run
primary surpluses in the future.
 According to the IMF (2002), debt sustainability is defined asa situation in which a borrower is expected to be able tocontinue servicing its debts without an unrealistically large
future correction to the balance of income and expenditure.
 Mendoza and Oviedo (2003) take fiscal sustainability to meanthat the present value of total government spending equals
its revenues.

The issues of fiscal sustainability
 Alvarado et al. (2004) define as fiscally sustainable asituation that satisfies the two following conditions:
namely, (i) a country can satisfy its budget constraint and(ii) it does not keep accumulating debt while knowing thata major future adjustment will be needed in order toservice its debt
 Gunter (2003) and Burnside (2003) who definesustainability to mean that a country can meet its current
and future debt service obligations in full without recourse
to debt relief, rescheduling or accumulation of arrears.
 Ko and Morita (2015) define that the government debt issustainable in so far as its debt hovers at some level.

The intertemporal budget constraint

The intertemporal budget constraint

Assessment of fiscal sustainability

Assessment of fiscal sustainability

Assessment of fiscal sustainability

Assessment of fiscal sustainability
 Hakkio and Rush (1991) point out that if there iscointegration between government revenue andexpenditure with 0 < b ≤ 1, then the condition thatprevents a Ponzi game situation is satisfied. In this mode,the value of b is defined as the degree of sustainability. If0 < b < 1, we have ‘weak’ sustainability, meanwhile b = 1
presents ‘strong’ sustainability or sustainability in thestrict sense.
 Quintos (1995) states that 0 < b ≤ 1 would be a necessary
and sufficient condition for the fiscal sustainability, andthe presence of a cointegration relationship between Rt
and GGt is also a sufficient condition for fiscal
sustainability.

Literature review
 The empirical literature has followed two different
approaches to test fiscal sustainability: (i) testingstationarity of the various fiscal variables and (ii)employing cointegration techniques and explores theexistence of a long-run equilibrium relationshipbetween government revenue and expenditure.
 Recent literature deals with the cross-sectional analysis
of fiscal sustainability by applying panel data methods
that have a number of advantages.
 Very few studies on fiscal sustainability apply panel
stationarity and cointegration tests for developing
Asian countries.

Literature review
Author and date

Country - Period

DataMethods

Sustainability

Frequency
Panel Data Studies
Lau and10 Asian countries (1970 AnnualPanelYes when applying commonly

Baharumshah-2003)

stationarity

used panel unit root techniques

Panel

Yes (weak sustainability)(2005)
Adedeji and5 Asia Countries (India,Thornton (2010)

Pakistan, the Philippines,

Annualcointegration

Sri Lanka and Thailand)
1974-2001
Syed et al. (2014) 10 Asian countries

Annual(1990-2010)
Sharstri, Giri and05 major South Asian

Mohapatra (2017) countries (1985-2014)

AnnualPanel

Yes for SAARC countries and No

cointegration

for IMT-GT countries

Panel

Yes (weak sustainability)

cointegration

Empirical Analysis

Stylised Facts and Data Overview
 The sustainability of fiscal policy is evaluated for a sampleof eight ASEAN countries, namely Cambodia, Indonesia,Lao, Malaysia, Myanmar, Philippines, Thailand andVietnam.
 The research uses annual data drawn from theInternational Monetary Fund’s World Economic Outlook
Database. It is conducted using annual series covering
the period 1989-2017 for each of the variables.
 The variables of government debt, revenue andexpenditure are measured in terms of their ratio tonominal GDP.

Testing for individual stationarity
ADF Tests of Government Debt for Individual Countries
DeterministicInterceptIntercept and trend

t-statProb.

t-statProb.

Cambodia-2.070037

0.2575-2.806384

0.211

Indonesia-2.292388

0.1856-2.370906

0.3757

Lao-2.427962

0.1501-0.069009

0.9901

Malaysia-2.802939*

0.0711-3.989171**

0.0216

Myanmar-2.335193

0.1745-1.019114

0.9136

Philippines-0.965896

0.7476-1.898383

0.6228Thailand-4.132302***0.0047-5.943868***0.0005

Vietnam

0.754756

0.989-2.569192

0.296

Note: MacKinnon values for rejection of hypothesis of a unit root at 1% level (***), 5% level(**) and 10% level (*).

Testing for individual stationarity
ADF tests for First Differences of Gov. Debt for Individual Countries

Deterministic

Intercept

Intercept and trend

t-statProb.

t-statProb.

Cambodia-3.107579*

0.0422-3.023599

0.1504

Indonesia-1.399198

0.5497-4.273392**

0.0214

Lao-0.900056

0.7565-3.789246**

0.0476

Malaysia-2.811682*

0.0704-2.98946

0.1538Myanmar-4.466258***

0.0035-5.173999***

0.0037Philippines-3.959587***

0.0063-3.870347**

0.0307

Thailand-5.812275***0.0001-5.007021***0.0037

Vietnam-4.399768***

0.0044-4.533252***

0.0139Note: MacKinnon values for rejection of hypothesis of a unit root at 1% level (***), 5% level(**) and 10% level (*).

Panel stationarity tests
 A number of panel unit root tests advocated by• Levin, Lin and Chu (2002) (LLC)• Im, Pesaran and Shin (2003) (IPS)• Breitung (2000),• Maddala and Wu (1999) (ADF Fisher)• Choi (2001) (PP Fisher) To test the stationarity of the government debt, revenue andexpenditure.

Panel Unit Root Test Result of the Fiscal Variables
Level

First level difference

Public debt

Revenue

Expenditure Public debt

Revenue

Expenditure-1.62952**

0.51035-0.93293-3.22932***-1.21695-4.88557***( 0.0516)( 0.6951)( 0.1754)( 0.0006)( 0.1118)( 0.0000)-0.671030.32519-1.21735( 0.2511)( 0.6275)( 0.1117)( 0.0000)

20.0159

12.3304

22.321250.8125*** 45.0221*** 66.3477***( 0.2195)( 0.7209)( 0.1331)( 0.0000)

47.0222***21.3305

32.7895*** 87.2074*** 121.538*** 164.287***( 0.0001)( 0.1662)( 0.0079)

Intercept
LLC
IPS
MW-ADFFisher Chisquare
Choi-PPFisher Chi-4.37279*** -3.91902*** -5.99765***( 0.0000)(0.0000)( 0.0001)( 0.0000)( 0.0000)( 0.0000)( 0.0000)

squareNote: *, **, *** indicates rejection of the null hypothesis of a unit root at 10%, 5% and 1%,
levels of significance. The p-values are in parenthesis.

Panel Unit Root Test Result of the Fiscal Variables (const.)
Level
Public debt

First level difference

Revenue Expenditure Public debt

RevenueExpenditure-2.00334**

0.62742-0.47479 -2.54335***

1.26634-3.67637***( 0.0226)( 0.7348)( 0.3175)( 0.8973)( 0.0001)-0.48801

0.17227-0.20073 -3.79641*** -1.90820** -4.50181***( 0.3128)( 0.5684)( 0.4205)( 0.0001)( 0.0282)

MW-ADF-Fisher

18.1544

13.3713

15.212342.3458***

28.0336** 49.8148***

Chi square( 0.3149)( 0.6454)( 0.5091)( 0.0004)( 0.0313)

Choi-PP-Fisher 46.5081*** 17.2856

24.9326*85.5765*** 97.7951*** 159.881***Intercept and Trend
LLC
IPS( 0.0055)( 0.0000)(0.0000)

Chi square( 0.0001)( 0.3674)( 0.0710)( 0.0000)

Breitung

1.17676-0.53740-0.65223-2.28164** -2.88352*** -4.25704***t -stat( 0.8804)( 0.2955)( 0.2571)(0.0113)( 0.0000)( 0.0020)( 0.0000)( 0.0000)

Panel stationarity test results
The debt series were differencestationary, which indicates that fiscal
policy in the ASEAN countries was weakly
sustainable.
The government revenue andexpenditure-to-GDP ratios have beenfound to be integrated of order 1 or I(1).

Panel cointegration tests

Panel cointegration tests using Pedroni (1999, 2004)
Panel Statistic
Statistic

Group Statistic

Weighted Statistic

Statistic

Deterministic Specification: Individual Intercept
V-statistic

0.631852

0.672257

Rho-statistic-1.473633*-1.420397*-0.345906

PP-statistic-2.034499**-1.868591**-1.526736*

ADF-statistic-0.461455-0.296649

0.123717

Deterministic Specification: Constant & Trend
V-statistic

0.003391-0.165520

Rho-statistic-0.586272-0.768135

0.390816

PP-statistic-2.110140**-2.255461**-1.990003**

ADF-statistic-0.309480-0.582810-0.343685

Deterministic Specification: No Constant & Trend
V-statistic

1.604687*

1.004218

Rho-statistic-3.778273***-4.283910***-1.510270*

PP-statistic-3.483134***-3.796752***-3.451615***

ADF-statistic-2.642071***-3.211381***-2.301851**

Panel cointegration tests using Kao (1999)
Kao (1999) Residual Cointegration Test
Ho: No cointegrationt-StatisticADF-2.707225***(0.0034)

Estimation of cointegrating relationship The null hypothesis of no cointegration between theseries is rejected, the coefficient of the long-run
relation between government revenue andexpenditure can be estimated.
 Strong coefficient b is unity. Weak solvency occurs
when b is less than unity.
 Fully Modified Ordinary Least Square (FMOLS) and
Dynamic Ordinary Least Squares (DOLS) are
implemented.

Estimation of the cointegrating coefficient
Estimation Method

FMOLS

DOLS

PooledGroupedPooledGrouped0.897160.883913

0.893314

0.88272

77.0236***95.73238***74.7861***

86.20750***(0.0000)(0.0000)(0.0000)(0.0000)

No. of observations

178

178

162

162

R-squared adjusted

0.780352

0.777873

0.845744

0.841067

77.02360***

95.73238***74.78610***86.20750***( 0.0000)( 0.0000)( 0.0000)( 0.0000)

Long-run coefficientt-statistic

b=0

b=1

-8.829104*** -12.57282***( 0.0000)( 0.0000)-8.931473*** -11.45376***( 0.0000)( 0.0000)

Note: ***, ** and * indicate 1%, 5% and 10% level of significance respectively. The p-values
are in parenthesis.

Estimation of cointegrating relationship The existence of a long-run cointegrating relationship between
government revenue and expenditure that is statisticallysignificant
 The average of the estimated slopes is 0.889, meaning that, on
average, a 1% change in government expenditure leads to a
0.889 % change in government revenues for the consideredgroup of eight ASEAN countries.
 Further Wald tests on the model reject both the null
hypothesis of b = 0 and b = 1 at the conventional significantlevels.
 The empirical tests show that two non-stationary variables,
government revenue and expenditure, are cointegrated andfiscal policy can be judged sustainable only in the weak form.

Conclusion and Policy Implications

Conclusion
 This paper has closely assessed the fiscal sustainabilityof public finance for eight ASEAN countries including
Cambodia, Indonesia, Lao, Malaysia, Myanmar,Philippines, Thailand and Vietnam by exploiting thedata from 1989 to 2017.
 The econometric methods employed in the paper
include both time series and panel data techniques.
 The evidences provide broad support for a weakly
sustainable fiscal policy in line with the recent literature.

Policy Implications
1. Weak fiscal sustainability in the aforementioned
countries reflects that government expenditures aresystematically higher than government revenues.
2. ASEAN countries need to improve public debtmanagement.
3. Regional policymakers should continue to give highpriority to improving or adopting fiscal rules.
4. A need to rebuild fiscal space to deal with contingent
liability shocks remains, arising from the worsening
demographics in future.

Thank you for your attention

Q&A session