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Policy measures may ease Covid-19 effects, but not offset recession: Moody’s

Jun 25. 2020
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The latest report from Moody’s Investors Service says that policy measures taken by the Asean-5 economies – Malaysia (A3 stable), the Philippines (Baa2 stable), Indonesia (Baa2 stable), Vietnam (Ba3 negative) and Thailand (Baa1 stable) – may reduce some of the negative effects of the Covid-19 outbreak, but will not offset the rising recession or credit risks for most sectors.

"The various policy measures will mitigate credit-negative pressure on companies, banks and the broader economy, but weakness in trade, commodity prices and general sentiment will weigh on growth for all five economies," said Deborah Tan, a Moody's assistant vice president.

The five economies are highly integrated in regional manufacturing supply chains and are experiencing sharp declines in external trade flows, while ongoing travel restrictions are weighing on tourism-related revenue and export earnings.

At the same time, sluggish commodity prices are pressuring fiscal revenues for commodity exporters.

Financial market volatility triggered capital outflows in March and April, although lower dependence on foreign-currency denominated debt for most governments will to some extent shield them from currency depreciation risk

“Fiscal costs of the support measures will be significant, with debt burdens only stabilising from 2021 for most economies, although the Asean-5 countries had adequate buffers prior to the pandemic that provide them with the fiscal space to respond to the crisis," Tan added.

Policy measures for the financial sector have mostly focused on providing liquidity to banks to support new lending and through credit restructuring such as debt moratoriums. As moratoriums are lifted, banks’ problem loans will likely increase.

Few corporate sectors will benefit directly from government support, with strategically important state-owned enterprises likely to take priority in receiving direct financial support. Still, privately owned companies will receive some support from broader policy measures such as temporary tax relief and lower interest rates.

The infrastructure sector will also get limited support, as with the exception of Indonesia, few countries in the region have taken steps to support these companies. Governments have also shifted some of the burden related to policy support to utilities and other infrastructure providers. Nevertheless, the essential nature of these companies’ services may help shore up demand for some.

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