Fiscal policy in Sri Lanka, currency trouble in Thailand

Although the crisis has led to a sharp rise in government debt, policymakers across Asia appear in little rush to tighten fiscal policy. The key exception is Sri Lanka, where a sharp tightening of fiscal policy next year looks inevitable. If this fails to put the government’s finances on a more sustainable path, a default is likely. The Thai baht this week hit a seven-year high against the US dollar, causing renewed concern for exporters and policymakers. Looking ahead, we think Thailand is likely to have to adapt to the reality of continued inflows and further upward pressure on its currency as the global economy recovers, risk appetite increases, and the dollar weakens across the board. We are changing our forecast for the Thai baht.