Moody’s outlook for sovereign creditworthiness in 2022 in Asia Pacific (APAC) is stable overall, reflecting our expectations for the fundamental conditions that will drive sovereign credit over the next 12-18 months, relative to 2021.
Economic growth rates in APAC are rebounding although the pace of recovery varies vastly. Debt burdens are stabilising, but at higher levels than before the pandemic. In 2022, shifting gears to a normalisation phase will entail difficult policy choices for many governments, with attention turning back to medium-term social and environmental considerations, even with economic recovery just starting to take hold.
The ability of policymakers to balance competing economic and social policy goals, including the rebuilding of fiscal buffers, retraining attention on structural reforms and anchoring the credibility of medium-term frameworks, will drive credit differentiation and determine where the pandemic leaves significant burdens on credit profiles.
Most APAC economies are likely to rebound to pre-pandemic output levels by 2022 although pace of recovery will vary
Over 2022-25, Moody’s expects more than half of APAC economies to return to or above pre-pandemic growth averages. However, differing degrees of exposure to vulnerable sectors, coronavirus vaccination rates and approaches to reopening will result in a multispeed recovery.
Some economies will log growth below pre-pandemic levels. These include Indonesia (Baa2 stable), but the gap here will likely be slim and we expect it to close as recovery gathers pace. Some tourism-dependent economies will record growth considerably above recent rates as they rebound from particularly weak output in 2020-21, as long as new variants do not derail their recoveries.
By contrast, we expect a structural economic slowdown in China (A1 stable), reflecting population ageing and policy efforts to reduce leverage in and rebalance the economy, amplified by a deterioration in property market conditions and supply chain reconfiguration. And for some frontier markets, the pandemic has presented a permanent setback to growth.
Despite the return to pre-pandemic growth rates, Moody’s expects the level of output to still fall short of our pre-pandemic forecasts by 2023 (see Exhibit 1).
We estimate that about one-third of APAC economies will experience limited economic scarring, while around 40% will see deeper scarring. On average, however, output losses will be less severe than in other parts of the world. Some sovereigns facing permanent loss of output have concentrated economic structures or weaker institutional frameworks, such as Maldives (Caa1 stable) and Papua New Guinea (B2 negative).
As the immediate effects of the pandemic start to ebb, companies are increasingly likely to re-evaluate their production strategies and supply chains.
For several large APAC economies that are manufacturing nodes in global supply chains, this could present some challenges to their growth models in the short run but drive greater productivity and innovation over time.
Debt burdens to peak in 2022 and stabilise, but at higher levels
Varying recoveries will also shape fiscal and debt dynamics. Median debt burdens will likely stabilise for most APAC economies in 2022, but bringing them down will be a challenge as the emphasis remains on governments to support output.
Following an increase of around two percentage points of GDP on average over 2020-21, about half of APAC governments will likely record a decline in their debt burdens in 2022 relative to 2021 estimates, as revenue starts to recover and some stimulus gradually unwinds. Although debt will stay significantly above pre-pandemic levels, median ratios remain lower in APAC than in other regions.
Many APAC emerging and frontier markets will continue to report a gradual upward drift in their debt burdens, but some advanced economies also feature, such as Australia (Aaa stable), Korea (Aa2 stable) and New Zealand (Aaa stable).
Looking beyond 2022-23, deficits are unlikely to decline significantly further as spending pressures persist, leaving sovereigns weakly positioned to respond to future shocks. The onus will fall on growth recoveries, including productivity increases, to drive further debt reduction.
A few advanced economies (Japan [A1 stable], Korea, Australia) will face greater challenges given their weak potential growth or structural budget deficits. Among emerging markets (including Indonesia, Malaysia [A3 stable], India [Baa3 stable], Thailand [Baa1 stable]), debt burdens will mostly flatten out at higher, varying levels. For tourism-dependent economies, debt ratios have climbed substantially and will take a longer time to stabilise. Only a few economies have experienced a compression in debt burdens, either on the back of strong growth (for example, Vietnam [Ba3 positive]) or from elevated pre-pandemic debt levels (Pakistan [B3 stable]) (see Exhibit 2).
Accommodative monetary policy will support debt affordability in the near term, particularly for advanced economies. By contrast, for several emerging markets in the region, interest payments as a share of revenue materially increased over the past two years, and did not moderate in 2021, as revenue remained weak.
While unconventional central bank support in some systems, such as in Indonesia and Philippines, alleviated interest costs, this did not offset rising debt costs. Particularly for those governments with weaker starting points, such as Sri Lanka (Caa2 stable), Maldives and Laos (Caa2 negative), limited debt affordability will leave less room for fiscal manoeuvre and continue to present government liquidity risks.
Normalisation will entail difficult policy choices for many governments
Looking ahead, the ability of policymakers to rebuild fiscal buffers, refocus on structural reforms, and anchor the credibility of medium-term frameworks will drive credit differentiation and determine where the pandemic has left significant burdens on credit profiles.
Mismatches between demand and supply as growth rebounds raise the risk of rising inflation. This could spur some central banks to start moving to a tighter policy stance once a reliable economic recovery is in sight, increasing interest costs. Progressive policy normalisation in advanced economies will add to pressures on the interest burden, potentially raising liquidity or external vulnerability risks further – particularly for lower-rated economies that rely on foreign currency borrowing.
The withdrawal of forbearance or unconventional support will present financial stability challenges for some economies. In China, policy has resulted in a significant tightening in financing conditions for highly leveraged property developers such as China Evergrande Group (Ca negative).
Many governments continue to grapple with the health-related costs of the pandemic, even as long-standing social challenges pose spending pressures.
These include achieving more inclusive growth and addressing income inequality, reckoning with the social costs of aging populations and meeting climate goals. Many governments will meet the cost via greater flexibility in reinstating previous fiscal rules, including debt and deficit ceilings. Where there is a credible plan to shortly stabilise or reduce debt burdens, or revenue-raising steps are in place, credit implications will be contained.
More broadly, debate around income inequality and structural unemployment may create political noise, increasing challenges to policy effectiveness, although we expect the direction of reforms and policies to be largely unchanged.
