As Asian economies take on public debt to combat Covid-19, who will foot the bill?

People wearing protective masks as a precaution against the coronavirus disease (Covid-19) walk during lunch hour at the central business district in Singapore, on Dec 14, 2020.
PHOTO: Reuters

In May, when Singapore tightened its measures for four weeks to combat a surge in Covid-19 cases, it cost the government $800 million in relief measures. The money helped businesses, including fitness studios, performing arts organisations and eateries, survive that month of harsher rules.

Across the border, Malaysia recently unveiled a 150 billion ringgit (S$48 billion) package, made up of cash aid and wage subsidies, after extending a nationwide lockdown indefinitely.

In Southeast Asia, where most countries are battling new waves of infections driven by the more contagious Delta variant, these scenes have become all too familiar. With each fresh surge, governments impose tough restrictions and then come up with headline-grabbing fiscal injections to rescue their economies.

But as this cycle of uncertainty drags on, there are rising concerns that countries’ ability to continue throwing money at the situation is limited, and that the financial burden from the pandemic will be inherited by the younger generations. This worry is particularly pronounced in a region where the end-game seems unclear amid stalling vaccination drives.

Analysts paint a mixed picture of the region. Some say that while countries like Singapore, which is small and has much fiscal firepower, are likely to come through relatively unscathed others, like the Philippines and Indonesia , could end up with towering debts. They say the key for economies to recover lies in ramping up their vaccination programmes.

Rising government debt

The pandemic has evidently taken a toll on economies. In the fourth quarter of 2020, global government debt accounted for 105 per cent of global GDP, up from 88 per cent in 2019, the highest level since the aftermath of World War II.

Southeast Asia was not spared. Figures from the Economist Intelligence Unit (EIU) show the public debt level in the Philippines rose from about 40 per cent of its GDP in 2019 to 55 per cent last year. In Thailand , the ratio jumped more than 10 percentage points to 52 per cent of GDP.

Selena Ling, head of treasury research and strategy at OCBC Bank, said that governments around the world had rushed to provide unprecedented policy support – both fiscal and monetary – when the pandemic struck. But for countries in Asia, fiscal policies did most of the heavy-lifting due to their relatively low benchmark interest rates.

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Within the region, countries adopted different approaches too. Fung Siu, principal economist for Asia at the EIU, said Singapore could readily tap its vast reserves because it pursued a counter cyclical fiscal policy, which meant that it reduced spending during economic booms and increased it during recessions.

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“[Other] governments do not pursue such a policy,” she said. “Indonesia, Malaysia and Thailand spent beyond their fiscal means in pursuit of attaining various self-imposed development goals, which meant no funds were set aside for a rainy day.”

In Singapore, which has virtually no net government debt, the government committed some $100 billion to help businesses at the height of the pandemic last year, drawing some S$53 billion from its past reserves.

Officials acknowledge that Singapore was in a unique position. In announcing more aid last week, Finance Minister Lawrence Wong told lawmakers: “We are one of the very few exceptions to this trend of rising public debt around the world.”

“Not many people are paying attention to how all these debts will be serviced. They may look affordable now but will not be so once interest rates increase to more normal levels,” he said. “The day of reckoning will come, and the burden will surely fall on the young and future generations.”

Day of reckoning

Economists have sounded alarm bells too. Paul Kent, economist and partner at KPMG Singapore, said some Southeast Asian countries had already run up high national debts before the pandemic.

“This is certainly a worry because the Covid-19 support measures funded by the governments are further stressing the debt-to-GDP ratios, and this in turn limits the capacity for them to fund future projects or support measures in times of crisis,” he said.

High debt levels would put a country at risk of a prolonged economic depression, and also had implications for currency strengths and employment, Kent said.

OCBC’s Ling suggested the fiscal power of developing economies in Southeast Asia was “probably limited” moving forward. For instance, Malaysia’s debt-to-GDP ratio was at a high of about 58.5 per cent and there was “not much room to manoeuvre” given the country’s statutory debt limit of 60 per cent, she said. This was why the recent stimulus package had largely comprised loan moratoriums.

How much longer can governments sustain their fiscal injections? Fung from the EIU felt there was no particular “breaking point”, pointing out that Japan’s public debt ratio had long exceeded 200 per cent of its GDP yet it remained the world’s third largest economy.

The challenge now would be for countries to ensure steady growth momentum next year or face delaying or abandoning large parts of their policy agendas. It was likely that governments in Malaysia, Indonesia and the Philippines would draft recovery budgets in the next year, she added.

The speed at which economies bounce back may also depend on countries’ demographics. In places where the working age and taxpayer populations continued to grow, paying down the debt will not be so onerous.

But in places with ageing populations, societal problems like generational angst could emerge. Experts point to the experience of Japan, where the living standards of the younger generation, who face higher tax rates, is very different to what the older generation enjoyed at their age.

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While the demographic profile of the Philippines, Thailand and Malaysia were favourable, higher taxes would be a hit to disposable incomes and therefore had the potential to slow economic growth, Fung said.

Fung also said governments in Asia seemed to have more leeway than European nations as their stimulus measures were smaller proportions of their GDPs.

The fiscal responses of Germany and France, for example, exceeded 20 per cent of their GDPs. In contrast, the overall fiscal stimulus for the Philippines was about 6.4 per cent of GDP, and Thailand’s was 10 per cent.

Alex Holmes, an economist at Capital Economics, said the “slight hangover” from fiscal borrowing would pay off.

“Countries may have to pay back the debts in the years ahead and perhaps run a slightly tighter fiscal policy but the cost of not offering support when you are locked down would destroy the economy completely,” he said.

While the recurrent tightening and loosening of restrictions would hamper growth, Holmes said the worst could be over because people had adapted to living and working around the virus, with traditional businesses moving online.

For countries that relied heavily on international tourism, there were semblances of reopening, Holmes said, though he acknowledged a full recovery could take time.

Phuket, the Thai resort island, last week welcomed its first batch of quarantine-free tourists, with authorities expecting the scheme to generate some 8.9 billion baht (US$274 million).

Fatimah Halidin, 95, gets a shot of the Sinovac vaccine in Sabak Bernam, Malaysia.
PHOTO: Reuters

‘Vaccination is the endgame’

Moving forward, vaccinations would be the focus for countries looking to emerge from the pandemic. This point was raised recently by International Monetary Fund chief Kristalina Georgieva.

“Vaccine policy this year, probably next year, is going to be the most important economic policy, [and it] may beat even monetary and fiscal policy in terms of significance,” she said in an interview with CNBC.

“A prerequisite to bring the world to a sustained high level of growth everywhere is to vaccinate all people and that’s not yet done.”

Health-care experts in the region agreed that governments should look to ramp up vaccinations.

Ben Cowling, a professor of epidemiology at the University of Hong Kong’s School of Public Health said more lockdowns could be expected in the short-term until high vaccination rates were achieved.

“Until we have high vaccine coverage, we will be stuck with the measures that have been used in the past year – on-arrival quarantines, face masks, and social distancing measures,” he added.

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Abrar Chughtai, an epidemiologist at the University of New South Wales, said that even as mutant strains of the virus proved to be more transmissible, most vaccines were working against them. In other words, “vaccination is the endgame”, he said.

Teo Yik Ying, dean of the National University of Singapore’s Saw Swee Hock School of Public Health, said striving for herd immunity had always been the strategy but achieving this through widespread vaccination had faced obstacles.

The global inequity in vaccine access and distribution meant there would be resource-poor jurisdictions that would never be able to receive or afford a sufficient supply of vaccines to inoculate their populations, he said.

Already, countries in the region have starkly different vaccination rates. In Singapore, more than 66 per cent of its 5.7 million population has already received at least one dose and close to 40 per cent have been fully vaccinated.

But its neighbours have been slow – only about 5 per cent of Indonesia’s population have been fully inoculated, 2.7 per cent in the Philippines, and close to 10 per cent in Malaysia.

Given Asia’s diversity – not just in economic strength but in culture, geography and health literacy, Teo said large variations in vaccine roll-outs and uptake rates were to be expected. Low- and middle-income countries would probably face growing challenges if booster vaccine shots were needed, Teo said.

“As such, the population in these jurisdictions will remain susceptible to further outbreaks, until a sufficient percentage of the people in the population have been exposed to the coronavirus to develop natural immunity,” added Teo.

This article was first published in South China Morning Post.