Fitch Economists Positive about Asia’s Second Half Economic Growth

Diep Nguyen

Economic growth will turn positive for Asia in 2H20, but the process of fiscal consolidation is set to be more protracted for the region, says Fitch Ratings.

Fitch Economists Positive about Asia’s Second Half Economic Growth
The majority of rated sovereigns in the Asia Pacific (APAC) will see a sustained increase in general government (GG) debt as a share of GDP in 2020-2022. This is in line with Fitch’s expectations for many other parts of the world, reflecting the lingering fiscal impact of the coronavirus pandemic and the efforts to counter it.
Many Asian economies entered 2020 with fiscal policy space (relative to rating peers) to counter an unexpected downturn, such as Indonesia (BBB/Stable), Korea (AA-/Stable) and New Zealand (AA/Positive). 
Fitch has also indicated that rating decisions centred on the fiscal outlook will be guided in part by sovereigns' record of fiscal consolidation in more favourable economic conditions. In some cases, failure to lower public debt-to-GDP ratios as the health crisis subsides could add pressure on ratings.
The economic recovery will lift fiscal revenues and gradually reduce the need for crisis-related spending. Nevertheless, Fitch expects public debt to continue to rise as a share of GDP for more than half of our rated APAC sovereigns in both 2021 and 2022. This group includes some of the region's biggest economies: China (A+/Stable), Japan (A/Negative), Korea, Australia (AAA/Negative) and Indonesia.
Within South Asia, Fitch currently forecastss that India's (BBB-/Negative) ratio of GG debt-to-GDP will stabilise in the fiscal year ending March 2022 at just above 85%, from around 70% before the coronavirus shock, as its economy recovers from a steep downturn. There is uncertainty about the outlook, however, relating to India's post-pandemic growth potential and fiscal policies. 
Both Pakistan (B-/Stable) and Sri Lanka (B-/Negative) have GG debt-to-GDP levels above the median for their rating peer group. Fitch believes Pakistan will start to lower its public debt-to-GDP ratio in 2022 under its IMF-supported programme, but we project a sustained increase for Sri Lanka throughout 2020-2022.
In contrast, Fitch expects Malaysia (A-/Negative) to make progress on fiscal consolidation throughout 2021-2022, as oil prices rebound and an economic recovery facilitates the roll-off of temporary stimulus measures implemented to cushion the pandemic's effects. Mongolia (B/Stable) will also cut public debt as a share of GDP, from an estimated 69.9% in 2020 to 61.5% in 2022, with economic growth and government revenues underpinned by rising mineral exports.
The medium-term fiscal outlook will be an important consideration in our rating assessments and in some cases, a lack of progress on fiscal consolidation after the sharp deterioration in public finances in 2020 could affect creditworthiness. That said, Fitch’s economic forecasts for Asia, as elsewhere, remain subject to a high degree of uncertainty, due to the evolution of the pandemic. Geopolitical risks, in particular trade tensions between the US and China, could also affect regional supply chains.
Nearly all of the eight APAC sovereigns on Negative Outlook could be vulnerable to downgrades if their public debt-to-GDP levels were to deteriorate further over the medium term. The exception is Macao (AA/Negative), which has no public debt and whose Negative Outlook reflects the territory's increasing economic and socio-political linkages with lower-rated mainland China.