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Low-debt Asia-Pacific economies well-placed to weather coronavirus

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Low-debt Asia-Pacific economies well-placed to weather coronavirus

Many economies in Asia-Pacific have built strong buffers of reserves and their central banks still have room to ease further, giving them a better chance to weather the coronavirus pandemic, economists said.

The starting point for public debt and fiscal deficit in Asia is "favorable" as the debt-to-GDP ratio is generally more manageable, ranging between 30% and 55% for most economies except India and Japan, said Govinda Finn, Japan and developed Asia economist at Aberdeen Standard Investments.

That "implies the public sector still has room to lever up. The starting point of fiscal deficit is also manageable, with most Asian economies except China and India running deficits no more than 3.5% of GDP in 2019," Finn said in emailed comments.

Still, Asia is not immune to the challenges the rest of the world faces. The International Monetary Fund said in an April report that the global economy will experience its worst recession since the Great Depression. It expects the global economy to contract by 3.0% this year, while growth is projected to be near-zero in Asia-Pacific, compared with 4.6% in 2019.

"The key challenge near-term is to manage and sequence the exit from lockdown to restart the economic engine and alleviate economic hardship for the people, while preparing for potential returning waves of infection," said Selena Ling, head of treasury and economic research at Oversea-Chinese Banking Corp. in Singapore.

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Opening stimulus spigots

Governments have been stepping up fiscal stimulus, with China and Indonesia raising their fiscal deficit limit to 5% of GDP. Central banks have preferred to let their currencies bear the brunt of the adjustment and have resorted to targeted liquidity injections while being more measured with rate cuts, Ling said.

"Asian central banks have not been in a terrible rush to front load rate cuts. ... Given that Asian policy rates still have some room away from zero bound, there is still policy space," she said, adding that their thinking may be to preserve some ammunition as the pandemic may drag on.

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Asian governments have unleashed massive stimulus packages to protect their economies.

Japan revealed a stimulus package April 20 amounting to ¥117.1 trillion that will expand cash payouts of ¥100,000 for every citizen. Hong Kong is paying all its permanent residents and the poor among the new arrivals HK$10,000 each. Singapore announced four fiscal stimulus packages totaling S$63.7 billion, which accounts for 13% of its GDP. India on May 14 unveiled a 20 trillion rupee stimulus package, or roughly 10% of national GDP.

However, Robert Carnell, regional head of research for Asia-Pacific at ING, warned against generalizations that the whole of Asia is in better fiscal shape to fight the pandemic than the rest of the world.

"The richer nations of APAC, such as Singapore, with super-sound fiscal ratios, were certainly able to, and have done, more than, say, most of Europe or the U.S. [South] Korea, too, is in good shape, but needs it less as they have had a relatively good pandemic avoiding lockdown," he said.

However, Japan is in "terrible" fiscal shape with a debt-to-GDP ratio in excess of 200%. Several countries have "been padding out their packages with fluff — soft loans, early access to pensions savings" to avoid ratings downgrades, Carnell added.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Large foreign exchange reserves give some buffers for policymakers in the region, Carnell said. "What has made it easier to spend now, and not worry unduly, is where debt ratios are reasonable, as they are for most of Asia, aside from India and Malaysia," he added.

India is struggling, with cases surpassing 100,000 and the extended lockdown raising financial stability risks. Nomura said in May that it expects the Indian economy to contract 5% in 2020 before recovering in 2021. The Reserve Bank of India will likely ease more, the Japanese brokerage said, after the central bank announced steep rate cuts and steps to increase liquidity, especially for cash-starved sectors.

China may lead way

"China appears to be in the early stage of an upturn," Nomura said, though it still expects the GDP to contract in the current quarter due to slumping external demand. The world's second-biggest economy may contract 0.5% year over year in the second quarter, though the decline may be shallower than the 6.8% contraction in the January-to-March period. It expects Beijing to deliver a large stimulus package focused more on providing financial relief amid a threat of a second wave of infections.

For most nations in the region, the Asian financial crisis of 1997-1998 was "a wake-up call, and memories of the crisis are still fresh. Several big and small crises since then have reinforced regulatory agencies in Asia," said CIMB Private Bank analyst Song Seng Wun.

"Despite all the worry, the exchange rates are a very good gauge for investor risk," Song said, noting that the pressure on most Asian currencies has been "far more manageable this time."

Among factors that will determine the recovery, Finn said the effectiveness of the public health response to the virus, the scope for countercyclical policy support and sensitivity to the global cycle will be key.

"The East Asian economies of Japan, Korea and Taiwan score well on the public health response and aggressive policy response. They are deeply embedded into the global industrial cycle but do have a large domestic source of demand that the government will be eager to prop up in the short term," Finn said.

New lessons

The coronavirus crisis may serve as another reminder for Asian economies to support regional trade and cooperation, said Ling of OCBC.

For example, if ASEAN economies "can integrate more and facilitate trade faster post-COVID, the recovery may be accelerated. This crisis has clearly illustrated the need to be prepared for a healthcare crisis in addition to an economic crisis," she said.

Asian economies should aim to increase their resilience by having essential medical supplies and fight the urge to become more insular, said Taimur Baig, chief economist of DBS Group Research. Fighting such pandemics needs cooperation and coordination at the international level and there is no substitute to growing by exchanging capital, ideas and technology, he said.

Baig said: "The popular thesis these days is that the post-COVID world will be more insular, with a tendency to bring technology and production closer to home.

"The legacy of this crisis should be that we are all interconnected on this planet, and our prosperity and safety depend on leaning on each-other, not by becoming isolated islands."

As of May 20, US$1 was equivalent to ¥107.37, S$1.41 and 75.52 Indian rupees.