Unwinding stimulus measures to be main challenge for governments in 2010
By Ng Baoying, Channel NewsAsia | Posted: 29 December 2009 2258 hrs

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SINGAPORE: Heading into 2010, governments worldwide will have to start addressing the issue of when to withdraw stimulus measures.

With timing being a critical factor, analysts said that a premature move could hurt the recovery process. And this is true for Singapore as well.

The global business environment went through challenging times during the financial crisis, when credit was tight. And to ensure the economy still chugged along, governments turned to quantitative easing and poured billions of dollars into their economies.

But this fiscal stimulus does not come without a cost.

Leon Perera, group managing director, Spire Research and Consultancy said: "The main challenge governments will face in 2010 in terms of financing, will be unravelling the economic fiscal stimulus programmes put in place in 2009, but doing so at a pace that is gradual, not sudden and drastic."

According to ratings agency Moody's, the overall theme for 2010 will be a normalisation of government financing conditions, or at worse, a severe tightening.

With Asia poised to lead recovery going forward, analysts said governments in the region will have an easier time dealing with the issue. However, they will still have to tread carefully, to ensure that they don't derail the recovery process.

Alvin Liew, economist, Standard Chartered said: "In Singapore's case, we do see they are modifying measures implemented in late 2008 and early 2009 through the budget stimulus package.

"They are modifying it, but not removing it entirely for 2010. That shows that Singapore is quite mindful of removing these policies too early before companies can really recover."

Beyond the near term, analysts said that public finances will face more challenges - such as dealing with ageing populations.

Mr Perera said: "I think there will have to be some form of increasing tax contribution to the government, but in ways that are indirect such as to minimize the impact on economic activity.

"I think one of the longer term avenues to do this will probably be taxes on carbon emissions and polluting activity."

A tax such as this will not only help support government spending, but also have the dual effect of managing climate change.

- CNA/sc