Update Country Report Maldives 24 Mar 2020

Compared with the support packages being assembled in response to the coronavirus (Covid-19) in North America and Europe, the fiscal response in Asia has been modest. While a number of countries have outlined additional spending plans since the outbreak this year, the total runs to only around US$135bn. Meanwhile, the US is preparing a stimulus package of nearly US$2trn, while EU members have outlined similarly bold fiscal commitments, with Germany alone promising around US$600bn.

Fiscal conservatism reflects several factors. Among them, some of Asia's largest economies believed they had been successful in containing the extent of the outbreak. A combination of tightly enforced lockdowns, widespread testing and detailed contact tracing allowed China, Hong Kong, Singapore, South Korea and Taiwan to exert a measure of control over the proliferation of coronavirus cases after initial outbreaks. Given that supply-side disruption looked like it would be mainly confined to the first quarter, regional governments hoped their economies would bounce back without needing to have recourse to expansive fiscal policy.

A conservative approach will not suffice, however, with the pandemic having gripped developed western economies and a "second wave" of imported cases disrupting progress towards economic normalisation in countries that believed they had it largely under control. Moreover, with more countries in South Asia and South-east Asia facing the likelihood of widespread coronavirus outbreaks, the regional economic impact is set to widen. As a result, fiscal spending to support companies and households across Asia will need to be ramped up.

Room to expand fiscal support

Asia has the space to loosen fiscal policy settings more extensively. The aggregate budget deficit across the region's 20 largest economies stood at the equivalent to 3.3% of GDP in 2019. This was wider than the estimated OECD average that year of 2.6%, but far below the region's peak of 5.3% in 2009 during the global financial crisis. Australia, Hong Kong, New Zealand, Singapore, South Korea and Taiwan were among the economies estimated to have kept their deficits to within 1.5% of GDP in 2019.

Public debt levels are also manageable. The region had an estimated aggregate debt-to-GDP ratio of 63.2% in 2019, above the commonly cited international threshold of 60%. Nevertheless, this has come down from a peak of 78% in 2009 and compares favourably with a ratio of nearly 90% across OECD countries in 2019. Asia's ratio is also skewed by Japan, which had an estimated public debt of around 225% that year (and does not encounter problems funding its debt). Excluding Japan, the region's public debt ratio would have been under 30%.

There are some caveats. Fiscal space in Asia's largest economy, China, is not as plentiful as suggested by headline numbers showing estimated GDP ratios of 4.3% and 18.4% for the fiscal deficit and public debt, respectively, in 2019. These figures do not account for liabilities held by government-linked financing vehicles and state-owned enterprises. Nevertheless, we still believe there is room within Asia to ramp up its fiscal response, especially given the likelihood of low borrowing costs for the governments of major economies in the region.

China and Japan to lead response

Asia's two largest economies-China and Japan-will be fundamental in shaping the region's fiscal response. Stimulus actions in the two economies will also have an important effect on economic prospects in the wider region, as demand ripples through supply chains. While China has been surprisingly reticent in formalising its fiscal spend, despite being the first country to tackle coronavirus, we believe it will bring through an expenditure boost in the region of US$700bn, weighted more to tax and fee cuts than infrastructure spending. Meanwhile, Japan is thought to be preparing a US$275bn package for its 2020/21 fiscal year (April-March), adding to US$20bn already disbursed in coronavirus control efforts.

Trade-dependent economies are also likely to step up their efforts, given their exposure to imminent demand slumps in the US and EU. South Korea unveiled a US$9.8bn stimulus package in March, but will need to go much further to support its exporters and airline and tourist industries. Taiwan will likely expand the two modest packages it has unveiled to date, while Singapore has indicated it will enhance an existing US$4.4bn support package by drawing on the national reserve fund. These economies have the space to expand their support, but it will require abandoning a traditionally hawkish attitude towards fiscal policy.

Developing Asia will face a more challenging situation. In South-east Asia, Indonesia and Malaysia have already come forward with additional spending plans. However, they could face relatively high borrowing costs amid a global flight to safety among investors. A further concern is South Asia, where governments have yet to outline a fiscal response to the coronavirus crisis. India's government has in recent years lowered public debt to below 50% of GDP, but the effectiveness of the fiscal response could be undermined by financial sector strains and the fact that public spending is equivalent to only a small portion of GDP.

Stimulus priorities for Asia

For the region as a whole, we believe additional fiscal spending, alongside that already announced, will eventually run to US$1-1.5trn. Factoring in a challenging year for economic growth and the likelihood that not all this spending will be on-budget (especially in the case of China), this will push the regional aggregate budget deficit ratio above 5%. It remains a more modest fiscal expansion than those being countenanced in Europe and North America, but will help to preserve economic growth in the region in 2020.

As elsewhere, the main goal of the packages to be announced in Asia will be meeting the short-term liquidity needs of companies and households, as well as boosting healthcare budgets. A failure by governments to provide wider guarantees on corporate loans will lead to widespread bankruptcies, with the region's companies having taken advantage of low interest rates to borrow extensively in recent years. Troubled sectors will include export manufacturing, travel and tourism, alongside industries dependent on overseas debt (such as China's property developers). New Zealand has already taken steps to bail out its national airline.

For the household sector, we believe additional policies related to mortgage payment holidays, social security support and wage subsidies will be introduced. Some governments will experiment with direct government transfers to households; Hong Kong announced a cash handout equivalent to US$1,280 for its permanent residents in its 2020/21 budget. Japan is also reportedly considering universal handouts as part of its stimulus package. However, most countries will be more selective. Australia is offering additional cash payments, but only to those on some form of government benefit. China will focus instead on providing consumer subsidies for retail goods.

Asia's response may be more distinctive in the global context in terms of efforts to kick-start public infrastructure projects. We do not anticipate a return to the pace of project build that began during the global financial crisis; moreover, spending on such projects is unlikely to be mobilised quickly enough to support near-term economic growth and employment. Nevertheless, with the regional infrastructure agenda having advanced rapidly in recent years, there remains scope to accelerate plans in 2020. Areas to watch for additional spending will include 5G communications, healthcare facilities, high-speed railway and renewable energy.