global perspectives

Asia policy response to the pandemic

15 June 2020

Nivedita Sunil

Portfolio Manager

Asia Fixed Income team

The US policy response to the economic effects of the COVID-19 pandemic was fast and aggressive, and helped form a bottom in credit spreads in Asian markets. Generally speaking, emerging markets (EM) are more constrained in their ability to respond to the ongoing COVID-19 crisis. However, Asian economies have caught up in recent weeks with innovative, thoughtful policy responses that have a calibrated mix of direct and contingent fiscal impulses.

We believe this will further support Asian credit markets. Low oil prices and manageable FX debt obligations provide Asian investment grade economies with much more flexibility to respond, and we expect further policy flexibility in the coming weeks.

India: sizeable credit-linked support

India announced headline stimulus worth 10.5% of GDP in May that included both fiscal (6.5% of GDP) and monetary easing (4% of GDP). Of these measures, the direct fiscal costs are just 1.3 ppt of GDP, while credit guarantees and special funding facilities account for ~4 ppt of GDP. The credit-linked measures supporting MSMEs and NBFCs¹ are an important backstop to prevent further economic deterioration. An asset quality clean-up in the financial sector will need to follow to normalise growth back to its potential.

Another positive surprise has been a commitment to use the crisis to implement much-needed structural reforms in agriculture, industry, labour, deregulation and privatisation of SOEs². While these might not help revive demand in the near term, they are an important anchor to India’s investment grade sovereign rating to revive its medium-term growth potential. Execution will be key, but we are cautiously optimistic so far.

China: targeted response with a focus on employment

China’s response from the politburo meetings has been to prioritise employment, with the numerical growth target suspended due to the large uncertainty. The focus has turned to stimulating new infrastructure investment (such as 5G networks and data centres) and faster urbanisation (renovating communities and services) to support domestic demand. Monetary policy will play a significant role, and M2 (money supply) and TSF³ growth are likely to be significantly higher than last year.

Recently, the People’s Bank of China (PBOC) has rolled out measures to support SME financing linked to stable employment, and will likely follow with further creative measures. Such inward focused measures are unlikely to buoy commodity-linked EM countries in the same way as 2009. However, they will succeed in engineering a healthy recovery within China in our view.

Indonesia: breathing room from supportive macro sentiment

Indonesia’s policy announcements have amounted to ~3% of GDP so far, and there are indications that further rounds of fiscal and monetary easing will follow. More recently, Bank Indonesia announced its intention to directly fund a sizeable IDR 150 trillion of the government’s economic recovery programme through a private placement, in effect decreasing the pressure on markets to absorb the large amounts of gross issuance. With recent FX stabilisation and low inflation, Indonesia has more breathing room to respond to the crisis.

In the linked document, we outline the policy response announced in investment grade Asian economies. The more constrained Asian frontier market measures are also discussed - we expect these to remain more constrained in the coming weeks.

Please click here for the full document

sources.

¹ MSMEs refers to Indian Micro, Small and Medium Enterprises. NBFCs refer to Indian Non Banking Financial Companies

² SOE refers to state-owned enterprises

³ TSF refers to Chinese total social financing

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