BANGKOK — Governments across Asia are unleashing massive stimulus packages to support economies heading into recession as the novel coronavirus batters consumption and investment, threatening progress in shoring up fiscal and monetary policy management following previous crises.
Economists agree swift action is essential. Credit rating agencies, however, have their eyes on national fiscal health. Policymakers thus have to spend their conjured funds wisely to avoid loading future generations with perpetual debt while dodging damaging short-term credit downgrades.
The big three raters — Standard & Poor’s, Moody’s and Fitch — have yet to downgrade the sovereign rating of any large Asian economy, but outlooks have been lowered for Thailand, Indonesia, Malaysia and the Philippines, countries with experience weathering wrenching economic turmoil.
While the downward revisions are based more on uncertainties over the economic, political and fiscal health of these countries, failure to effectively use stimulus to recover from the current adversity could lead to cuts — increasing borrowing costs and leading to further economic trouble.
“Asian economies are caught between a rock and a hard place — between economic negligence and fiscal irresponsibility,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.
“Fiscal purse strings have been loosened considerably with governments, quite correctly, assuming the stance of holding back on fiscal stimulus just so, as to adhere to current fiscal consolidation plans is not prudent.”
Japan, Asia’s second-largest economy after China, is injecting around $1 trillion dollars, equivalent to about 20% of its gross domestic product. On Thursday, Prime Minister Shinzo Abe said the country would pass a second supplementary budget to support the economy. Neighboring South Korea’s package, meanwhile, is worth about 13.3% of GDP.
In Southeast Asia, Malaysia’s stimulus comes to 15% of the economy’s size, Singapore’s is 13%, while the Philippines and Indonesia are spending 7.8% and 3.9%, respectively. Thailand’s package of around $67 billion accounts for about 12% of its GDP.
Thailand, Southeast Asia’s second-largest economy after Indonesia, has marked tourism as a key growth pillar in recent years but that sector has been, perhaps if not the hardest, at least the most visibly hit by the pandemic. Overseas travelers have disappeared, in a body blow to proprietors and merchants.
“The economic impact from the COVID-19 pandemic will last another nine months,” Thai Prime Minister Prayuth Chan-ocha said at a news conference on May 5, suggesting no immediate end in sight to the pain.
The Thai cabinet approved a 1.9 trillion-baht ($59 billion) package in early April, allocating 600 billion baht for health care support and financial aid to affected citizens. This included a 5,000-baht monthly cash handout to 16 million self-employed and laid-off workers. A total of 900 billion baht of the spending will come from the Bank of Thailand working in tandem with the government. In addition to the package, the Thai cabinet set aside 1 trillion baht in late April to give cash to around 10 million farmers.
“Both fiscal and monetary expansion are the most important mechanisms in order to boost up the economy from this COVID-19 crisis,” said Piti Srisangnam, director of academic affairs at ASEAN Studies Center at Chulalongkorn University.
All three major ratings companies have downgraded Thailand’s credit outlook from positive to stable, but the economy isn’t the only concern.
S&P, which scores the country at BBB+, just remaining in investment grade territory, is more worried about its still fragile politics — quasi-civilian rule has tentatively returned following a 2014 military coup that once again put the generals back in charge — rather than burgeoning debt.
“We expect Thailand’s political transition under the elected government to be delayed during the COVID-19 outbreak-induced state of emergency,” S&P said when it downgraded its outlook.
Malaysia has announced two rounds of stimulus, worth a total of 270 billion ringgit ($62 billion). They consist of measures from providing financial aid to small- and mid-sized enterprises to injecting money through infrastructure project investments.
The response to the pandemic has fallen to new Prime Minister Muhyiddin Yassin, who took over earlier this year amid a spate of political uncertainty when predecessor Mahathir Mohamed suddenly resigned. Muhyiddin has put the cost to the economy from business closures and stay-at-home orders at 2.4 billion ringgit a day and called for a “clear plan” for recovery.
“The economy we built up over six decades would collapse” minus such a policy, he said.
Fitch downgraded Malaysia’s credit outlook from stable to negative, reflecting high uncertainty over the pandemic’s toll on export earnings and public finances.
The Philippines has readied 1.4 trillion pesos ($28 billion) in fiscal and monetary stimulus, resulting in Fitch downgrading its outlook from positive to stable.
Indonesia, Southeast Asia’s most populous country and biggest economy, has unveiled a much smaller package of 641.17 trillion rupiah ($43 billion). But perhaps more significantly, it has decided to temporarily scrap its budget deficit cap of 3% of GDP until 2023, as stimulus is poised to balloon the budget deficit to 6.27%.
President Joko Widodo stresses the measures will not be allowed to become permanent. “We would return to a disciplined fiscal policy with a 3 percent cap in 2023,” he said on March 31.
The country’s central bank has also bought government bonds in the primary market twice in April — a move that monetary authorities often try to avoid as it is seen as monetization, which while providing cash or debt relief in the short term can potentially fuel inflation and damage fiscal health.
S&P has lowered Indonesia’s credit outlook from stable to negative, saying it “may lower the rating if economic growth suffers a deeper or more prolonged slowdown over the next two years, or if Indonesia’s external or fiscal positions worsen beyond our current projections.”
Singapore, meanwhile, has passed packages worth about 64 billion Singapore dollars ($45 billion), including a 75% wage subsidy for employers and cash handouts to all adults.
“This is a landmark package and necessary response to a unique situation,” Singapore Deputy Prime Minister and Finance Minister Heng Swee Keat said in a speech in parliament on March 26. “The government must continue to ensure that monetary, financial, fiscal and regulatory policies work tightly to ease the impact on businesses and households.”
The International Monetary Fund forecasts emerging and developing Asian economies to expand 1.0% in 2020, mainly on positive growth in the largest economies of China and India. But other countries are expected to suffer sizable slowdowns or even contractions.
The intensity of the hit is seen as highly dependent on official policy responses. The IMF predicted in April that the Thai economy will contract by 6.7% this year, versus a forecast for 2.5% growth in January.
Malaysia and Singapore are seen shrinking 1.7% and 3.5%, respectively, in 2020, compared with the fund’s prior view for expansion of 4.5% and 1.2%. Low growth is projected for Indonesia and the Philippines.
For developed Asian economies, the fund saw Japan growing 0.7% in the January forecast, but now expects the world’s third-largest economy to contract by 5.2%. South Korea’s GDP is seen shrinking 1.2%.
Lockdowns and curfews across the region have limited coronavirus transmission but have also drastically curtailed human activity and — crucial for economic growth — spending on goods and services ranging from automobiles to airline tickets.
With a few exceptions such as data communications and food delivery services, people in Asia are generally buying less during the pandemic. Slowing consumer spending has prompted many companies to reconsider investment and expansion plans. That means heavy public outlays must make up for some of the expenditure lost due to the pandemic.
But memories of pain caused by the Asian financial crisis in the late 1990s are still fresh for many developing nations. That downturn prompted some to impose strict fiscal spending rules. They now face the dilemma of whether the scale of the current crisis merits breaching them.
In Thailand, finance ministry regulations state that public debt must not exceed 60% of GDP. It was 42% in 2019, according to the IMF.
While the country has said it will fund stimulus through issuing new debt, its large package combined with an economic contraction may push it close to the ceiling, which would leave little room for additional steps.
According to analysts from Maybank Kim Eng, Malaysia already had public debt equivalent to 52% of its GDP, near its ceiling of 55%. While only 10% of the 270 billion ringgit worth of assistance will be funded through direct fiscal injection, the measures will bring the country dangerously close to infringing the barrier.
But Ahmed M. Saeed, Asian Development Bank Vice President for Southeast Asia, East Asia and the Pacific, backs ample use of government spending.
“The question for debt always is, is the cost of capital lower than the economic benefit to be gained?” he said. “There is absolutely no question that at this particular moment, given the enormous contraction of global economic activity, raising debt and spending is something that is the appropriate and right thing for governments to do.”
Varathan at Mizuho said that tax revenues will rise for countries that successfully recover. But he said those that need to spend more for economic revival may end up with higher taxes and thus may push state-owned enterprises to cough up more dividends.
“Payment for fiscal policy will be borne by economies through growth or inflated away,” Varathan said. “There will be no free lunch.”
Additional reporting by Kentaro Iwamoto in Singapore, Shotaro Tani in Jakarta, P Prem Kumar in Kuala Lumpur, and Cliff Venzon in Manila.