Twin Deficits and Debt in ASEAN-6 Countries

Twin deficits is often a subject of analysis, and this issue has always been a concern of policymakers. However, twin deficits phenomenon is highly affected by the accumulation of debts. The high debts level will influence the economy performance of a country, hence it is important to monitor the debts level. By applying panel data approach, this study aims to investigate the relationship between twin deficits and debts, as well as to develop the threshold level of debts in ASEAN-6 countries. The sample period is from 1990 to 2016 with annual frequency for ASEAN-6 countries. The dependent variable is current account balance (CAB), whereas the independent variables involved are fiscal balance (FB), real Gross Domestic Product (RGDP), real effective exchange rate (REER), and the age dependency ratio for the old and the young (ADRO and ADRY) with public debt (PD) as the additional independent variable. The main methodologies applied are pooled mean group (PMG) estimation and threshold splitting model estimation. The major empirical finding indicates that without threshold level, current account balance and fiscal balance behave positive significant relationship with the presence of public debt. The threshold level for public debt-to GDP is estimated at 51.42%. When the public debt-to-GDP is lower than the estimated threshold level, current account balance and fiscal balance show a significant but negative relationship; while public debt-to-GDP is greater than estimated threshold level, current account balance and fiscal balance perform a significant positive relation. Furthermore, as refer to the overall average public debt of each country, the result indicates that public debt level of Singapore and Philippines are above the estimated threshold level; whereas Indonesia, Malaysia, Thailand, and Vietnam have public debt level that are below the estimated threshold level. On the policy implication, fiscal consolidation can be implemented to sustain the fiscal and current account of country. Fiscal rules is useful in limiting government spending, income, and even debt. In fiscal consolidation, if fiscal adjustment is expenditure rather than tax drive, the debt will be stabilized and stability is long-lasting