Fiscal deficits in the APAC region are set to narrow modestly in 2022, although the consolidation will remain gradual leading to only limited debt reduction and rebuilding of fiscal buffers in the medium term, Fitch Ratings said on Tuesday.
Subdued economic recovery in a large part of Asia is a key reason for the sustained high deficits, as emergence from pandemic-related headwinds has been slower than in other regions, said the report titled “APAC Sovereigns Dashboard: Post-Pandemic Fiscal Consolidation to Be Gradual”.
High commodity prices and rising interest rates will add to near-term fiscal challenges, said Fitch Ratings. It said that government revenue has broadly recovered to 2019 levels, but expenditure is forecast to remain above pre-pandemic levels in most sovereigns in 2022. Pandemic-related spending will roll off further after 2022, but some spending may prove sticky.
The sharp rise in commodity prices and bond yields over the past month poses a risk to fiscal consolidation in 2022. Some governments have increased commodity-related subsidies and revenue growth could also be more subdued. Bond yields are likely to increase further after jumping recently amid tightening global financial conditions, which will add pressure on interest burdens in the next few years.
Fitch said that general government debt ratios have jumped sharply during the pandemic in APAC and globally. Most APAC debt ratios are still below or in line with peer medians, but higher debt burdens leave less fiscal space from a rating perspective to respond to future shocks.
“We expect the rebuilding of fiscal buffers in APAC to be limited, reflected in relatively stable debt ratio trajectories, on average, in the region. A forecast return to high growth over the next several years will support the stabilisation of, but not considerable reductions in, debt ratios in many sovereigns,” said Fitch.