Thanks to the Covid-19 pandemic, many Southeast Asian countries, several of which are already forecast to careen into recession this year, will see themselves in hock.
Malcolm Cook
9 April 2020
The plague of the Covid-19 pandemic is leading to the unfortunate loss of lives globally. The loss looks set to be mirrored in the economic and fiscal sphere, particularly in Southeast Asia. Exports and tax revenues are declining, unplanned fiscal expenditures are mounting rapidly, as is the need for governments to borrow much more heavily. The Philippine Department of Finance estimates that the Covid-19 response will require US$5.7 billion more in external borrowings this year, while gross domestic product (GDP) may decline. The World Bank predicts that even in the best case-scenario for Southeast Asia in 2020, Malaysia and Thailand will fall into recession. In the worst-case scenario, Indonesia and the Philippines will join their ranks.
Covid-19’s implications for emerging market debt sustainability will be large, bad, and not short-lived. At a time when emerging market governments will have to borrow much more externally, borrowing conditions will be much less favourable.
The World Bank Group’s International Debt Statistics 2020 report indicates that three Southeast Asian economies – Cambodia, Indonesia and Laos – are not well positioned to deal with this deterioration. External debt to gross national income (GNI) ratios above 60 per cent and external debt-to-export ratios above 150 per cent are widely seen as debt sustainability warning signs. The average external debt to GNI ratio for the 121 low and middle-income economies in the report was 26 per cent. The average external debt to exports ratio was 101 per cent.
Southeast Asian emerging markets’ external debt stock ratios (2018)
| of GNI | of exports | 2014-18 growth | |
| SEA | |||
| Cambodia | 67% | 81% | 89% |
| Indonesia | 37% | 170% | 26% |
| Laos | 90% | 245% | 62% |
| Myanmar | 22% | 87% | 4% |
| Philippines | 20% | 78% | 2% |
| Thailand | 35% | 49% | 16% |
| Vietnam | 47% | 42% | 49% |
Source: The World Bank Group
Laos, the smallest economy in Southeast Asia, is in the most tenuous position. Both of its debt sustainability ratios are well above the warning sign levels, the country has little foreign exchange reserve cover, and external debt has been growing rapidly from 2014. About 52 per cent of Laos’ external debt is owed to private creditors. Fortunately, only 3 per cent of the total stock is in short-term instruments.
The World Bank Group’s International Debt Statistics 2020 report indicates that three Southeast Asian economies – Cambodia, Indonesia and Laos – are not well positioned to deal with this deterioration.
Cambodia’s debt to GNI ratio is also comparatively high, while the textile industry that accounts for up to 80 per cent of Cambodia’s total exports is being pummelled by the pandemic and trade and human rights tensions with the European Union. Cambodia’s external debt stock was growing rapidly before Covid-19 and its fiscal position was already hard-hit. About 48 per cent of Cambodia’s external debt is owed to private creditors and 15 per cent of total stock is in short-term instruments.
The external debt to GNI ratio for Indonesia, the region’s largest economy, is hovering above the warning sign level due to the country’s comparatively closed economy. About 83 per cent of Indonesia’s external debt is owed to private creditors and 14 per cent of total stock is in short-term instruments. Given that Indonesia is predicted to go into a recession this year and be badly affected by the virus, its current debt levels does not augur well for Southeast Asia’s most populous economy – or the region writ large.
Dr Malcolm Cook is a Visiting Senior Fellow at the ISEAS – Yusof Ishak Institute.
ISEAS Commentary — 2020/49
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