Governments across Asia are increasingly having to face an awkward piece of arithmetic. The claims on their budgets keep rising, from pensioners, hospitals, their armed forces and half-built infrastructure, while bondholders must be paid first whatever else is pressing.
This is not a pan-Asian debt crisis, because the region’s balance sheets differ far too much for that oversimplification. A broad squeeze is nonetheless underway, and it raises a political question most capitals across the continent would prefer to put off: who ultimately settles the bill?
The International Monetary Fund’s October regional outlook sets out the backdrop. Public debt across much of Asia has stayed high since the pandemic, and ageing societies in addition to rising military budgets and more expensive borrowing are all adding strain. A policy brief from the UN’s ESCAP puts the demographic case more bluntly still. It argues that the developing Asia-Pacific region is greying so fast that it has little time to prepare its public finances.
Japan offers the clearest preview of where that road leads and has done so for several decades. Almost three in ten Japanese are now 65 or older. The internal affairs ministry puts the share at 29.6%, or some 36.24mn people, and the national population research institute expects it to reach 36.3% by 2045. For many years Tokyo has been able to fund the resulting welfare bill at near-zero interest rates. That era is ending, however. In April the coupon on new 10-year government bonds was raised to 2.4%. On September 1 the benchmark yield briefly touched 3%, a level not seen since October 1996.
The trigger was revealing but few saw it coming. A day earlier, ministries had lodged record budget requests of JPY143 trillion ($912bn) for the coming fiscal year under Prime Minister Sanae Takaichi. Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management at the time, said attention had turned to “how the budget size will be determined, what specific revenue source will be used and how spending will be controlled to maintain fiscal discipline.” Those are the very questions the rest of the region is now facing.
South Korea, which faces rapid ageing of its own, has chosen to spend its way forward. Seoul’s draft 2027 budget of KRW821 trillion ($620.3bn) is 12.8% bigger than this year’s, the steepest annual rise on record. The bulk of the money goes to artificial intelligence, childcare and regional development. National debt is forecast to climb to KRW1.520 quadrillion from KRW1.414 quadrillion. Stronger growth is expected to bring the debt ratio down to 48.3% of GDP from 51.6% even so. The plan relies heavily on a projected 30.4% surge in revenue, much of it from semiconductor taxes. That is a sensible wager during a boom but looks less safe given how quickly sentiment can sour, as the recent chip sell-off in Seoul and Tokyo demonstrated.
Defence is the newest claimant on the purse. Taiwan’s Cabinet has requested a TWD606bn ($19.12bn at the time) supplementary budget for drones and missile defence. The request follows the opposition-controlled legislature’s decision in May to cut TWD470bn from a TWD1.25 trillion special defence package. Whatever one makes of the politics on the self-governing island state off China, security spending on that scale has to be paid for through taxes, borrowing or cuts elsewhere.
Southeast Asia shows what the squeeze looks like where incomes are lower and currencies weaker. Manila’s outstanding debt reached a record PHP18.49 trillion ($304.73bn) at the end of March. The peso’s fall from PHP57.639 to PHP60.678 against the dollar between end-February and end-March alone added PHP299.5bn to the value of foreign obligations.
Because of this, the Development Budget Coordination Committee has also set out the price of starving loan-backed infrastructure. Congress has approved barely a quarter of the counterpart funds requested since 2022. Commitment fees paid to foreign lenders rose to $16.8mn in 2024, compared with $584,000 in 2017. Squeezing capital budgets to protect headline numbers, in other words, carries its own – significant – cost.
Indonesia’s debt meanwhile stands at a modest 41.26% of GDP, yet even Jakarta feels the pinch. Borrowing hit a record IDR10.3 quadrillion ($569bn) at the end of June. That prompted President Prabowo Subianto to instruct the Danantara sovereign fund to return part of its state-enterprise dividends to the treasury, money previously kept for reinvestment. Finance Minister Suahasil Nazara has also committed to holding the deficit within the statutory 3% ceiling.
Sri Lanka illustrates the far end of the spectrum. Fitch has lifted the country to B-, yet the agency’s forecasts are sobering. It expects a primary surplus of 2.6% of GDP this year alongside an overall deficit of 4.1%. The difference between those two figures implies interest costs of roughly 6.7% of output, against revenue of just under 16%. Around two-fifths of what Colombo collects is therefore already spoken for by creditors.
So who pays? The honest answer is that the burden will be shared by way of choices governments are reluctant to publicly name through fear of payback at the ballot box when the time comes: higher taxes, later retirement, thinner public services, or a quieter tolerance of inflation. Countries with deep domestic savings and credible institutions, Japan and Korea among them, can spread those costs over decades. Poorer borrowers exposed to the dollar have far less room.
As such, Asia is not heading for one great reckoning. It faces dozens of smaller ones, and the sooner its politicians admit that, the cheaper those reckonings are likely to be.