Bhutan should push savings to fund future investment

Did you know gross investment as a percentage of GDP was the highest in Bhutan, in a sample of 40 prominent developing countries.

This includes rapid industrializing countries like China, Korea, Malaysia, Thailand, Ethiopia, etc. Part of this is explained by the high share of imports in Bhutan. It is also attributable to lower private consumption, both in proportion and in absolute amounts.

Bhutan’s per-capita income is similar to Morocco, but it consumes a far less portion in absolute terms, i.e. $4100 vs. $4700.

Philippines and Indonesia’s per capita is close to it, but have a higher proportion of private consumption.

But while Bhutan consumes less, the growth in consumption has not lagged. The 5-year Compound Annual Growth Rate in Bhutan’s per capita was 5% with a similar average inflation was similar, i.e. net disposable income held flat. But savings add a new dimension. Its average savings rate slipped from the early-40s% in 2008-2012 to the early-30s% in 2013-2016. This implies some savings slipped to feed incremental consumption as net income was not supportive to do so. That tells a lot about the growing consumer behaviour in Bhutan.

Why do these numbers matter? It is because the lower saving meant less capital could be channelized into the real economy. Hence, the 5-year CAGR in investment was a mere 1%, despite investment comprising a large share in its economy. Moreover, IMF WEO projections expect investment to continue comprising a high share; in fact even higher. So where would incremental investment be funded from?

External borrowing is one, apart from assistance. IMF expects Bhutan’s government lending deficit to widen slightly in coming years, indicating its already factored in. Bhutan’s Ngultrum moves with the Indian Rupee, which appreciated in recent times against the USD. That may make fresh foreign currency borrowing slightly expensive.

At the same time, growth in investment correlates with import of machinery, adding pressure to reserves. In Pakistan, the twin pressures of excessive external borrowing and imports for fuelling investment are clouding its otherwise robust economic performance. While Bhutan’s financial health is far from such a state, it shouldn’t even move towards that!

The more compelling case is to boost domestic savings, as a channel to fuel investment. IMF projections expect Bhutan’s GDP to grow at a robust pace till 2021. Assuming tax to be unchanged, the net effect should be positive. But here we hit the growing consumption behaviour? As its average consumption is still on the lower side vs. peers, one assumes the propensity can rise further. After all, consumption behaviour is same everywhere. Since IMF estimates show an uptick in inflation in coming years, demand-led inflation may itself be a partial trigger for that; reaffirming our assumption of further growth in consumption.

Easier credit, instant gratification and lifestyle aspirations combine to make current consumption more attractive. It is also an incentive for foreign investors, and first-movers are often consumer brands. But a steady consumption growth is also needed. After all, it is a huge job-creator, especially of educated workforce in the services sector. Bhutan’s services sector forms 40% of GDP, far less than the average 60% in our sample. So demand-side controls on curbing consumption may prove counter-productive.

A supply-side push with a robust domestic financial industry may work better. This means it needs to offer a variety of saving and investment products, across categories, risks, assets, tenure and needs, especially earning inflation-adjusted returns. That would make investing (and postponing consumption) as attractive as current consumption.

In most developing countries, the paucity in the types of institutionalized products disincentivizes savers, and makes future consumption less attractive. This constrains the saving mobilization to fuel investment.

Southeast Asian nations made their financial sector more dynamic with regulations, products and talent between 1997 and now. They now have a high savings rate like China, Korea and India.

This domestic mobilization reduced their dependence on external debt for funding investment, which still continues at a healthy pace. Moreover, it helped fuel future consumption through unemployment phases. As it is, most developing countries rank relatively low on Okun’s Misery Index. The level of income distribution in Bhutan is moderate, with a gini-coefficient in the late-30s. Increased savings would only help the concentration of wealth in the long-term, irrespective of the concentration of income now. Interestingly, in say equities, Bhutan has a high trading velocity than Nepal despite having a much smaller market cap to GDP ratio. Given this interest, it is a compelling case to develop institutionalized fund products in such asset classes.

To leverage the demand-led consumption, it may explore taxing discretionary consumer products slightly higher. Discretionary products should have higher price elasticity, but the compulsive desire makes people buy it irrespective of a slight price-rise. If that is doable, it would give additional resources to spend on investment plans. But a tax has social implications, hence ideally should be a last-resort option.

At the end, Bhutan is one of the few countries which had admirably balanced sustainable development with economic growth. This aim would spell the future quantum of investments, irrespective of projections. But if investments do scale up, ramping up domestic saving may be an effective way to fund it, apart from borrowing or taxes!

By Sourajit Aiyer

Sourajit Aiyer is an author, guest-lecturer and financial services professional, and researches for South Asia Fast Track a business insights publication and platform.

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