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ֳ Wire

Infection Wave Highlights Pandemic Risk to SE Asian Sovereigns

Thu 22 Jul, 2021 - 3:21 AM ET

ֳ-Hong Kong-22 July 2021: The latest wave of Covid-19 infections in south-east Asian countries highlights the economic and public finance vulnerabilities to the pandemic in a number of countries in the region, as well as the high human cost of the crisis, says ֳ.

Pressure on sovereign ratings from the current wave of infections, or successive ones, will vary from country to country, depending on the duration and severity of the outbreaks, the effectiveness of policies to contain them (including vaccination rollouts), and efforts to minimize associated economic fallouts, as well as rating headroom available relative to peers.

Rating strains are already evident in the Philippines, where we revised the Outlook on the ‘BBB’ rating to Negative earlier in July. The country has not been as badly affected as some others in the region by the latest infection wave, but its economic contraction in 2020 was particularly deep. We believe there will be downside risks to medium-term growth prospects as a result of potential scarring effects, as well as possible challenges to unwinding the exceptional policy response to the health crisis and restoring sound public finances as the pandemic recedes.



Malaysia, Thailand and Indonesia have been among the worst affected in the region during the latest Covid-19 wave. The likely impact on economic activity in 3Q21 in Indonesia means that our current forecast of 4.8% GDP growth in 2021 may no longer be attainable; the government now projects 3.7%-4.5% growth. Planned fiscal consolidation that we had expected in next year’s budget (due to be submitted to parliament in August), including new revenue measures such as VAT rate increases, appears likely to be delayed beyond 2022. This would make it harder to reach the government’s goal of bringing the budget deficit back below the pre-pandemic cap of 3% by 2023. Unorthodox policy measures, including central bank financing of the deficit, could be extended, with possible effects on market sentiment and policy credibility. We flagged these risks as negative rating sensitivities in our last review in March.



We affirmed Malaysia’s rating at ‘BBB+’ with a Stable Outlook on 18 July, despite rising cases and its announcement of new fiscal spending measures to counter the effects of lockdowns on the economy. This partly reflected the sovereign’s underlying structural strengths, which will help to insulate it against the pandemic shock.

Exports may remain a source of support for many south-east Asian economies, as they did through 2020, but with a diminishing effect as we generally expect export growth to decelerate as demand conditions start to normalise in developed markets. Export manufacturing in places like Vietnam and Malaysia may also be hurt during the latest outbreak. However, the authorities have prioritised the sector with exemptions during lockdowns, and we expect this to mitigate the impact on GDP growth.

Continued outbreaks will set back prospects for countries with large tourism sectors such as Thailand, Vietnam and the Philippines. The latest infection wave came as Thailand had begun to experiment with quarantine-free opening to vaccinated tourists. The government has responded by announcing new spending and borrowing measures to address the economic impact, illustrating how such setbacks may add to pressure on public finances.

Progress on vaccination may gradually help to ease economic and fiscal risks and associated rating pressures. Authorities in Singapore, whose vaccination programme is well advanced, are preparing the country to live normally with Covid-19 as an ‘endemic’ disease. Nonetheless, they have moved to tighten restrictions on social activity significantly in July in response to rising case counts, illustrating the potential for new virus strains to present further setbacks, even in places with relatively high vaccination levels.



Contact:

Stephen Schwartz
Senior Director, Sovereigns
+852 2263 9938
ֳ (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central, Hong Kong

Thomas Rookmaaker
Director, Sovereigns
+852 2263 9891

Duncan Innes-Ker
Senior Director, ֳ Wire
+852 2263 9993

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com
Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: alanis.ko@thefitchgroup.com
Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com
Kyoshi Quyn, Colombo, Tel: +94 11 2541 900, Email: kyoshi.quyn@fitchratings.com
Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com
Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com

The above article originally appeared as a post on the ֳ Wire credit market commentary page. The original article can be accessed at . All opinions expressed are those of ֳ.


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