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US budget crisis risk for region

Staff Reporter | 12:22 AM | ||
THE fiscal deadlock in the US is an immediate risk for economies of East-Asia Pacific region including PNG, country economist with World Bank Pacific Department Timothy Bulman said.
The budget crisis broke after US government went into a partial shutdown early this month after the Republicans and Democrats failed to reach a deal on raising the limit of government borrowing.
This included borrowing to fund President Barack Obama’s signature healthcare programme. 
ABC online reported that the US Treasury said a default on bond payments could freeze global credit, spike borrowing costs and trigger a collapse worse than the Great Recession. 
It said the Republicans said they would not allow more borrowing unless the Democrats agreed to restructure the benefits programme or cut the deficit.
The White House had ruled out negotiations tied to the debt cap, the report said.
At a briefing with local media, Bulman said the US being the world’s top economy placed the risks for economies in the region, including PNG and Pacific Islands. 
“Our central scenario is one of a speedy resolution … but continued fiscal deadlock in the US could have considerable impact on the world economy and East Asia.  
“World Bank analysis done earlier this year (Global Economic Prospects, January 2013) suggested that East Asia and the Pacific could lose as much as one percentage point growth (against the US’ more than 2%) in case of a fiscal crisis.” 
Bulman said offsetting some of the uncertainty from the fiscal deadlock, the Federal Reserve’s decision to delay tapering of quantitative easing stabilised markets for now.
He said: “This gave countries some reprieve and a second chance to take measures to lower risks from future volatility, including a reduction of reliance on short term and foreign exchange denominated debt and continued flexibility in exchange rate.”
He said there were two channels from fiscal developments in US to PNG and Pacific.
“Cuts in government spending in the US would slow growth there, impacting demand and global prices for goods and services produced by the Pacific – from commodities to tourism. 
“It may also lead the Federal Reserve to a further delay in the tapering of monetary stimulus, which appears to be supporting commodity prices and exchange rates.
“A default on US government debt is likely to have far-reaching and profound negative consequences and it is such an unprecedented event that it is difficult to assess the consequences for PNG and the Pacific Islands,” Bulman said. 

The National /PMW