Posted by Holger van Eden[1]
Compared to Europe and the US the spread of COVID-19 here in Southeast Asia seems for the moment to be less dramatic, although in the past week or so countries like Malaysia, the Philippines and Indonesia have seen a worrying acceleration. One of the related PFM questions we have received recently here at the IMF Capacity Development Office in Thailand (which like all UN entities based in Bangkok is working from home), is whether ministries of finance are well positioned with respect to their cash holdings in these uncertain times.
Of course, all countries in the region have their Treasury Single Account (TSA) in one form or another, but the extent of active cash management - the smoothing of the cash balance through market operations - is quite limited. That means government cash balances vary substantially during the year. Is there a reason to increase average cash holdings during times of market uncertainty? Should the cash balance be increased in anticipation of stimulus spending and a higher fiscal deficit?
The answer to these questions is of course very much dependent on country circumstances, especially financial market conditions. However, the short answer is probably yes, higher cash balances are appropriate during times of financial market stress and it may be wise to frontload debt issuance somewhat in anticipation of expected stimulus measures. However, raising cash in uncertain times - like finding an umbrella while it is raining - is never easy. Higher debt issuance might place an even higher strain on capital markets. Markets could misread raising cash as a signal of increased fiscal stress rather than a confidence building measure. So, any increase in the government’s liquidity buffer should probably be done gradually and be explained well to the market.
Nevertheless, during the 2008/2009 global financial crisis many emerging market countries did increase their cash holdings. The main reason indicated by countries like Turkey, Brazil, Uruguay and Hungary was to signal to domestic bond markets that the government could withstand a “market freeze” due to unanticipated macro shocks. In addition to the normal transaction balance needed for smooth execution of the budget, countries introduced, or increased, a contingency buffer that was usually linked to one, two or even more months of debt service, gross financing requirement, or tax revenues. Informal surveys of state treasurers after the GFC indicated that they felt these additional cash holdings were helpful in stabilizing market sentiment.
Of course, some countries in Southeast Asia already have sizeable cash balances in the order of 1 to 2 percent of GDP. In those cases, the first question is what is the variability of these cash holdings? Perhaps it makes more sense to do some “rough tuning” to stabilize the government’s liquidity position. Most countries see a peak in liquidity in the first half of the year caused by late execution of the capital budget. Perhaps it is enough not to let the balance deteriorate toward the end of the year which is also still quite common.
Another remedy, often proposed by the IMF is to further expand the TSA. Just as a backstory, the first time I meet treasury officials here in the region I always start with the question: “Do you have a Treasury Single Account?” Somewhat indignantly the answer is always “Of course!…” (“Who is this advisor, we are not some backward country!” – one can hear the officials think!). TSAs are indeed one of the success stories of PFM reform of the last 20 years.
However, two qualifications are in order. First, in most countries the word “single” should not be taken too literally. Usually Treasuries have a variety of expenditure, revenue, transit, and trust accounts, not to mention foreign exchange accounts, mostly but not all held at the central bank. In many cases, the treasury’s domestic currency accounts are zero-balanced to the main Treasury account on a regular basis. There are, however, often several treasury accounts that remain sequestered from the main account.
Second, if one starts to dig somewhat deeper into the government’s overall liquidity management, there is often a lot of liquid assets out there not being used very efficiently. In some countries there is more liquidity outside the control of the State Treasury than within it. Social security and other off-budget funds, for example, often hold significant liquidity at commercial or state-owned banks. Line ministries may retain the non-tax revenues they collect, receive payment advances or have project investment accounts funded by donors or even by the budget. Autonomous bodies like universities and hospitals might receive their budget allocation in the form of lumpsum transfers.
Most OECD countries have long since centralized the liquidity management of the government sector. State treasuries in emerging market countries claim such centralization would require extensive legal changes (of the social security law, for example), lead to political backlash by autonomous bodies (who confuse cash transfers with budget allocations), or even impact state-owned banks which have grown accustomed to cheap financing through government bank accounts. Indeed, expanding the TSA is a difficult reform. But the benefits for the government’s liquidity position and its net financing cost can be huge. And, I would add, there is no time like a crisis to get a reform moving.
This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.
[1] IMF Regional PFM Advisor for Southeast Asia based at the Capacity Development Office in Thailand (CDOT).
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
