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Fiscal sustainability and contingent liabilities from recent credit expansions in South Korea and Thailand

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  • Diego Valderrama

Abstract

While South Korea and Thailand had relatively sustainable fiscal policies prior to the Asian crisis, the long-term cost of the bailout of their financial sectors amounted to an estimated 30 to 40 percent of output, which was largely financed by public borrowing. The recent credit expansions in South Korea and Thailand have created new contingent liabilities for the governments of the two countries. This paper evaluates the impact of these rapid credit expansions on the sustainability of fiscal policy in South Korea and Thailand. In Thailand, a rapid credit expansion preceded the currency collapse that heralded the Asian crisis. Fiscal policy in South Korea appears to be consistent with its long-run budget constraint, while fiscal policy in Thailand is not consistent with its long-run budget constraint. A loss in international confidence may considerably tighten their borrowing limit very rapidly, regardless of the long-run sustainability of fiscal policy.

Suggested Citation

  • Diego Valderrama, 2005. "Fiscal sustainability and contingent liabilities from recent credit expansions in South Korea and Thailand," Economic Review, Federal Reserve Bank of San Francisco, pages 29-41.
    • Handle: RePEc:fip:fedfer:y:2005:p:29-41
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    Cited by:

    1. Safdar Ullah Khan & Omar Farooq Saqib, 2008. "An Analysis of Pakistan's Vulnerability to Crisis," SBP Working Paper Series 21, State Bank of Pakistan, Research Department.
    2. Rudi Kurniawan, 2015. "Does Indonesia Pursue Sustainable Fiscal Policy?," Working Papers in Economics and Development Studies (WoPEDS) 201504, Department of Economics, Padjadjaran University, revised Nov 2015.

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    Keywords

    Financial crises - Asia ; Credit;

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