Policy measures may not offset Covid-19 economic damage in APAC: Moody's

Though Asia's external & fiscal buffers are generally more robust than those in other regions, equipping governments with more policy space, their policy responses will only cushion some of the impact

Recent policy measures by governments across Asia Pacific may not be enough to offset the impact of coronavirus (Covid-19) pandemic on their economies, says a recent note by Moody’s Investor Service (Moody’s).

“Although Asia's external and fiscal buffers are generally more robust than those in other regions, equipping most Asian governments with more policy space, their policy responses to date will only cushion some of the impact and not fully offset the economic and credit damage. In addition, not all countries in the region have the same capacity to respond,” Moody's said.

The Covid-19 pandemic, Moody's believes, will manifest itself through three types of shocks in the Asia Pacific (APAC) region - country-specific, regional and second-round.

“Widespread containment measures are crippling domestic consumption and production, which is spilling over to other parts of the region in the form of lower demand for commodities, imported goods and services, and supply chain disruptions,” wrote Deborah Tan, assistant vice-president at Moody's in a recent note.

The economic spillovers from country-specific shocks, Tan believes, are rapidly escalating into second-round shocks. While China has resumed economic activity and production, other economies are still grappling with the spread of the virus.

Banks vulnerable

Weaker economic prospects and the financial market rout, according to Moody's, will translate into a more adverse credit landscape for the banks in the Asia Pacific in 2020 and 2021. It expects, however, government support for larger, systemically important banks in the event of acute distress.

“Banking sector profitability will also decline as a result of higher loan-loss provisions related to deteriorating asset quality, lower net interest margins from lower policy rates and lower fee income on business activity. However, policy easing and liquidity injections by central banks will support banks’ access to funding and mitigate liquidity risks in the banking system,” Moody's said.

Among sectors, Moody's believes the credit shock will likely be most pronounced for airlines, automotive manufacturing and auto suppliers, gaming, retail and hospitality, oil and gas and shipping. Even once governments lift lockdowns, a complete revival of consumer confidence will be protracted, which points to prolonged pressure on credit quality for these sectors.

For smaller companies with weaker liquidity profiles, life will be even more challenging as they grapple with revenue loss during the lockdown and yet have to repay borrowed money once things return to normal.

“Spending packages for SMEs have largely taken the form of tax breaks, discounts and exemption. While these measures help to alleviate short-term liquidity constraints, they do not directly compensate for the revenue lost during shutdowns. In addition, these businesses still will need to repay the loans eventually, despite their deteriorating balance sheets,” Moody's cautions.