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ֳ Wire

Public Debt Rise Underscores Policy Challenges in APAC Outlook

Tue 08 Sep, 2020 - 12:16 AM ET

Related ֳ Content: APAC Sovereign Credit Overview 3Q20

ֳ-Hong Kong-08 September 2020: Economic growth will turn positive for Asia in 2H20, but the process of fiscal consolidation is set to be more protracted for the region, says ֳ.

The majority of rated sovereigns in the Asia Pacific (APAC) will see a sustained increase in general government (GG) debt as a share of GDP in 2020-2022. This is in line with our expectations for many other parts of the world, reflecting the lingering fiscal impact of the coronavirus pandemic and the efforts to counter it.

Many Asian economies entered 2020 with fiscal policy space (relative to rating peers) to counter an unexpected downturn, such as Indonesia (BBB/Stable), Korea (AA-/Stable) and New Zealand (AA/Positive). We have also indicated that rating decisions centred on the fiscal outlook will be guided in part by sovereigns' record of fiscal consolidation in more favourable economic conditions. In some cases, failure to lower public debt-to-GDP ratios as the health crisis subsides could add pressure on ratings.



The economic recovery will lift fiscal revenues and gradually reduce the need for crisis-related spending. Nevertheless, we expect public debt to continue to rise as a share of GDP for more than half of our rated APAC sovereigns in both 2021 and 2022. This group includes some of the region's biggest economies: China (A+/Stable), Japan (A/Negative), Korea, Australia (AAA/Negative) and Indonesia.

Within South Asia, we currently forecast that India's (BBB-/Negative) ratio of GG debt-to-GDP will stabilise in the fiscal year ending March 2022 at just above 85%, from around 70% before the coronavirus shock, as its economy recovers from a steep downturn. There is uncertainty about the outlook, however, relating to India's post-pandemic growth potential and fiscal policies. Both Pakistan (B-/Stable) and Sri Lanka (B-/Negative) have GG debt-to-GDP levels above the median for their rating peer group. We believe Pakistan will start to lower its public debt-to-GDP ratio in 2022 under its IMF-supported programme, but we project a sustained increase for Sri Lanka throughout 2020-2022.

In contrast, we expect Malaysia (A-/Negative) to make progress on fiscal consolidation throughout 2021-2022, as oil prices rebound and an economic recovery facilitates the roll-off of temporary stimulus measures implemented to cushion the pandemic's effects. Mongolia (B/Stable) will also cut public debt as a share of GDP, from an estimated 69.9% in 2020 to 61.5% in 2022, with economic growth and government revenues underpinned by rising mineral exports.

The medium-term fiscal outlook will be an important consideration in our rating assessments and in some cases, a lack of progress on fiscal consolidation after the sharp deterioration in public finances in 2020 could affect creditworthiness. That said, our economic forecasts for Asia, as elsewhere, remain subject to a high degree of uncertainty, due to the evolution of the pandemic. Geopolitical risks, in particular trade tensions between the US and China, could also affect regional supply chains.

Nearly all of the eight APAC sovereigns on Negative Outlook could be vulnerable to downgrades if their public debt-to-GDP levels were to deteriorate further over the medium term. The exception is Macao (AA/Negative), which has no public debt and whose Negative Outlook reflects the territory's increasing economic and socio-political linkages with lower-rated mainland China.

For more details on our credit views and forecasts on all 21 ֳ-rated APAC sovereigns, see "APAC Sovereign Credit Overview 3Q20", available at , or by clicking on the link above.

Contact:

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

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



Media Relations: 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

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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