In the event of further lockdowns or shocks to external demand, the Government of Pakistan (rating B3 stable) would have comparatively less fiscal headroom to support domestic economic activity, says Moody’s Investors Services (Moody’s).

Moody’s in its latest report stated that economies with relatively weak fiscal profiles, including India, Indonesia (Baa2 stable), Malaysia (A3 stable) and Pakistan, will be compelled to balance fiscal consolidation objectives with rising social demands to ameliorate structural problems such as weak governance, unequal access to healthcare or income inequality. These governments will face constraints on their ability to stimulate domestic demand or support companies as new pandemic-related disruptions to economic activity emerge.

The report further noted that in South Asia, pandemic control had improved significantly in recent months.

However, the outlook for new spikes in infections and economic disruption remains highly uncertain. Major new waves of the virus would also expose the relative fragility of the health systems of these economies. In the event of further lockdowns or shocks to external demand, the governments of India (Baa3 stable), Maldives (Caa1 stable), Pakistan (B3 stable) and Sri Lanka (Caa2 stable) would have comparatively less fiscal headroom to support domestic economic activity.

In Bangladesh (Ba3 stable), new waves of infections would pose risks to the informal workforce and the operation of key labour-intensive economic sectors such as textile and garment manufacturing.

The report noted that the pace of economic growth across the Asia-Pacific will stabilize in 2022, supporting a broad normalization of credit conditions across sectors.

That said, risks from the ongoing pandemic and other secular trends will remain, according to the report.“The gradual recovery to pre-pandemic output levels in APAC will reflect the reopening of economies, underpinned by rising vaccination rates, continued monetary or fiscal support that will wind down only gradually, and robust external demand fuelled by household spending, inventory restocking and global capital spending growth,” says Nishad Majmudar, a Moody’s assistant vice president and analyst. Nevertheless, growth disparities within the region and across sectors will remain stark as countries’ pandemic management, vaccination rates and secular trends amplify differences. Credit conditions will hinge on countries’ capacity to control new virus variants and adapt to endemicity, policymakers’ ability to maintain monetary or fiscal accommodation amid inflationary pressures, and the extent of international travel recovery.

Developments in the US (Aaa stable) and China (A1 stable) will also be important credit drivers.

A faster pace of monetary policy normalization in the US would negatively affect issuers reliant on dollar financing and drive capital flow volatility.

In China, any policy missteps in the country’s efforts to contain the impact of its property sector downturn and address social and income inequality could weaken its economic growth, with implications for the region’s economies.

Several secular trends will continue to present longer-term credit implications for Asian issuers. Automation, supply chain reconfiguration and geopolitical tensions in parts of the region will affect the technology and manufacturing sectors. And an increased focus on carbon neutrality will be negative for the region’s export economies that are unable to achieve their own de-carbonization goals.

This report was first published in Business Recorder on Jan 28, 2022.