APAC Recovery to Drive Modest Fiscal Consolidation in 2021: Fitch Ratings

December 08, 2020: Fiscal deficits are expected to narrow in 2021 across most rated sovereigns in the Asia Pacific (APAC), albeit modestly in many cases, as economies recover from the coronavirus pandemic shock, says Fitch Ratings.

The region's economic growth will average 6.8% in 2021. Although this performance is influenced by base effects, after an estimated 1.2% contraction in 2020, it compares favourably to our global growth forecast of 5.3%. The outperformance partly reflects the relative success of many regional sovereigns in containing the spread of the pandemic and should be supported by the eventual rollout of vaccines.

The pandemic may have a scarring effect on medium-term growth potential in some of the worst affected APAC sovereigns, such as India (BBB-/Negative), Indonesia (BBB/Stable) and the Philippines (BBB/Stable). However, in markets such as Indonesia and India, it has also galvanised economic reform programmes, which, if executed effectively, could offset the damage and boost longer-term growth prospects.

The majority of APAC sovereigns entered 2020 with fiscal and external buffers to implement sizeable policy responses to the coronavirus shock without exerting downward pressure on their ratings. Nonetheless, public debt levels remain an important factor in rating assessments and present a medium-term credit challenge in India, Japan (A/Negative), and Malaysia (BBB+/Stable), where debt ratios were above peer medians even before the pandemic shock and have risen in 2020. In 2021, we expect public debt to fall as a share of GDP in Malaysia (marginally) and India, but to remain on an upward track in Japan.

Government debt burdens also pose a more immediate risk for lower-rated APAC sovereigns such as Sri Lanka (CCC) and the Maldives (CCC), which face external financing pressures. Despite recent vaccine discoveries, we expect tourism inflows in 2021 to remain depressed in these two markets as a result of the pandemic, adding to these strains.

Fitch Ratings