Pandemic debt impact varies widely across Asia Pacific sovereigns: Fitch

Pandemic-induced fiscal responses and economic contractions have led to a sharp rise in public debt among rated sovereigns in the Asia-Pacific (APAC) region, but there is significant variation between individual sovereigns’ performance, says Fitch Ratings. 

Healthcare expenditures among APAC sovereigns have increased, and to varying degrees authorities have spent heavily to mitigate the shock to household and corporate balance sheets associated with the crisis, on measures ranging from furlough schemes to stimulus payments. Revenues have meanwhile been hit by the pandemic-driven drop in economic activity, along with temporary tax cuts and deferrals. 

The resulting increases in General Government (GG) debt have nevertheless varied widely. Between 2019 and 2021, GG debt/GDP is projected to rise by around 45pp in the Maldives and 27pp in Japan, but by just 3.0pp in Vietnam and 1.2pp in Taiwan. Much of the variation in the ratios can be accounted for by either the extent of the fiscal response (affecting the numerator), or changes in nominal GDP (the denominator) – or both. 

Relative success in containing the pandemic has both bolstered GDP and reduced the pressure on governments to provide support, helping to limit increases in GG debt/GDP ratios over 2019-2021 in places like China, Hong Kong, South Korea, Singapore, Taiwan and Vietnam. 

However, some countries where COVID case counts have been relatively low have still seen debt/GDP rise by more than the median for APAC, due partly to generous stimulus and support packages. This includes developed markets such as Australia, Japan and New Zealand. 

The increase in Japan’s GG debt, to a forecast 258% of GDP in 2021, also reflects a weak GDP performance in 2020-2021. The rise is notable, given that it already had the highest debt/GDP ratio of any Fitch-rated sovereign prior to the pandemic. 

Among emerging markets, strong nominal GDP growth in 2020-2021 and relative fiscal restraint help to explain why GG debt/GDP ratios have risen more slowly in Bangladesh, Pakistan and Vietnam, than in sovereigns like the Maldives, the Philippines and Thailand, where tourism sectors suffered in the pandemic. 

New waves of COVID infections continue to pose further fiscal risk, particularly in the majority of APAC sovereigns where vaccination programs are not well advanced. Illustrating this, governments in India, Malaysia, Taiwan and Thailand have announced additional fiscal stimulus in recent weeks in response to rising numbers of COVID cases in their jurisdictions. Partly as a result, we have widened our projections for fiscal deficits in Thailand and Taiwan in our latest quarterly forecast update. 

Many Asian sovereigns entered the pandemic with low GG debt/GDP levels relative to their respective rating peers, including New Zealand, Thailand, the Philippines, Indonesia, Vietnam and Bangladesh. Over 2020-2021, that gap has widened in Vietnam and Bangladesh, but has narrowed in New Zealand and the Philippines – though in neither of the latter two has debt risen above the peer median. 

In China and Taiwan, headroom relative to rating peers, which was marginal in 2019, has widened over the course of the pandemic. By contrast, Australia’s generous fiscal support program means that its GG debt/GDP levels have moved from being broadly in line with peers to being higher than them. 

Among the few APAC sovereigns where GG debt/GDP was already high relative to peers prior to the pandemic, the differential has widened in India and more significantly in Sri Lanka, but narrowed in Malaysia and more substantially in Pakistan. In the Maldives, GG debt/GDP surged during the crisis, which contributed to the deterioration in its rating, to ‘CCC’ at present, from ‘B+’ in 2019.