Mandiri Sekuritas Market commentary: It’s not even Spain, it’s the whole Europe

􀂄 Bank of International Settlements in March 2010 issued a working paper titled : The future of public debt : prospects and implications. Two tables presented below shown current public debt to GDP in several developed countries, and based on several assumptions made, what average primary balance required for the next 20 years to bring back the ratio to 2007 level. The data is scary, as we also need to understand the large unfunded liabilities stemming from future age-related expenditure. The estimates made without making overly strong assumptions about the future path of fiscal policy (which is unlikely to be constant).

􀂄 In BIS baseline case, they assume that government total revenue and nonage-related primary spending remain a constant percentage of GDP at the 2011 level as projected by the OECD. Using the CBO and European Commission projections for age-related spending, BIS then proceed to generate a path for total primary government spending and the primary balance over the next 30 years. Throughout the projection period, the real interest rate that determines the cost of funding is assumed to remain constant at its 1998-2007 average, and potential real GDP growth is set to the OECD-estimated post-crisis rate.

􀂄 If investors want to make the case, and government officials make the wrong policies, markets will surely rattled. However, when the dust settled, it bolstered the case of Asia as Table 1 shown Asia’s public debt/GDP at 40% level. Therefore while not excluding potential correction, we believe it will make it a stronger argument for Asia.