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Eugene Chen 陳仲漁

Why debt ceiling vs. capacity debate is hot in Taiwan

BY EUGENE CHEN 陳仲漁

When I was requested for comment about the government deficit of Taiwan recently, I told my friends that instead of government deficit, they should focus on the debt ceiling which limits the borrowing capacity of the government. It is because that deficit needs to be balanced by borrowing eventually.

And from the recent episode of American Congress coming to a showdown with Whitehouse, we can foresee that similar situation may happen in Taiwan in the near future.

The second point is that it is interested in making a comparison between Taiwan's national debt ceiling, which is 40% of GDP as stipulated by its constitution, and other developed countries. For instance, the American debt ceiling is over 100% of its GDP by far larger than Taiwan and many other emerging countries' national debts.

Another country with high national debt is Japan, reaching 240% of its GDP. In other words, it looks like that the debt ceiling of Taiwan still have a large capacity to grow vis-a-vis the USA, Japan and many other European countries whose debt ceilings of government are also around the range of 100% of GDP.

From reports, we notice that all governments claim that they have good reasons to borrow in order to make sure that it is functioning properly for the people, but the problem is how the capacity of borrowing can be so much different from 240% to 40% of GDP among countries, given the differences of the GDP per se. Does Japan borrow too much or does Taiwan borrow too little?

After financial crisis, nearly all European countries ,especially countries as PIGS, have been requested by the EU headquarter to take strong austerity measures to adjust spending, why Japan is not following the trend and keeps on rolling its debt to a new peak? What is the foundation of borrowing capacity to support Abenomics for further growth?

With high debt volume which is to convert to high principals and interests to be serviced later, how to sustain the confidence of the investors or lenders, either individuals or financial institutions, is a difficult job in the long run. Apart from keeping interest rate at low level, mechanism of bond market must be efficient enough to distribute debts among investors or lenders with reasonable terms and conditions.

From those high debts service countries or financially well-balanced countries, we notice that the higher domestic borrowing ratio, the more stable of the countries when facing crisis. This is to tell how important the domestic financial markets are in terms of borrowing capacity.

Japan is an excellent example for aping by the emerging countries including Taiwan, should they intend to build up their borrowing capacity to reach 100% or higher from domestic market in the future.

Apart from high level borrowing from domestic market, the legal process poised to the challenge of parliament for revising its ceiling, like The US government is facing, is also an imminent part of the job.
The irony is that given the comparatively low debt ceiling against capacity, like many other high debts countries.

The government of Taiwan is also under tight budget control and trying very hard to cut unnecessary public spending while maintaining a costly social welfare and medicare system with passive national defense concept.

Therefore, it seems no immediate need for the increase of debt ceiling in Taiwan unless the government is bracing up ambitious infrastructure projects or integrating with world class players aiming for the globalization of its economy.
 

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.

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Eugene Chen 陳仲漁

Eugene Chen 陳仲漁

Eugene Chen 陳仲漁 is currently the Managing Director and co-owner of Grand Aspect International, a consultant company. He is also one of the Turn Around Managers of European Bank of Reconstruction and Development (EBRD). He is an expert in Green Energy and Trade Finance.

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