Fiscal policy is at the core of the global response to coronavirus. Countries able to support sectors hit hard by the virus saw the fastest recoveries.

The ASEAN bloc of Southeast Asian nations is no exception. Governments in Malaysia, Singapore and Thailand allocated the most new spending and are seeing forecast-beating growth. But in some economies, expenditure did not rise too sharply because funds intended for projects postponed because of the pandemic were repurposed: the collapse in revenues is the greater cause of a jump in budget deficits.

Singapore has the greatest direct stimulus package, 14 per cent of GDP, with guarantees and loans equivalent to another 7 per cent. Malaysia’s fiscal stimulus totals over 20 per cent of GDP but most is loan guarantees, funding facilities and pension withdrawals, not fresh spending.

The focus so far has been supporting jobs, but for 2021 it will shift to propelling an economic recovery, focusing on infrastructure spending.

Despite the record stimulus packages in 2020, ASEAN policymakers appear reticent to withdraw support too quickly and risk derailing the nascent recovery. Their budget plans for 2021 are still expansionary with deficits expected to remain high. Other than in Singapore, nominal spending will increase even higher.

Most countries will wind down generous employment and business support measures in 2021, while retaining high expenditure on healthcare and cash transfers. But – unless the virus flares up – infrastructure will receive an extra boost as projects delayed in 2020 resume.

The structure of infrastructure financing is evolving. Some countries are turning more to public-private partnerships and demand for projects financed under mainland China’s belt-and-road initiative is likely to increase.

But the crisis struck at the core of governments’ tax base and revenues will normalise only after economic output does. The decline is particularly worrying in Indonesia, where tax revenue was already less than 10 per cent of GDP, and Malaysia, which has faced a steady fall in oil and gas revenues.

The crisis will have long-term effects on the region’s fiscal and debt profile. We do not expect deficits to normalise to pre-pandemic levels until at least 2023 so public debt as a share of GDP will keep edging higher even after the large jump in 2020. The multi-decade deleveraging process – seen, in particular, in the Philippines and Indonesia– has thus likely come to an end.

Malaysia’s recently raised public-debt limit of 60 per cent has already breached that threshold and it may need lifting again. Thailand is expected to change its fiscal rules too and Indonesia has suspended the 3 per cent limit on its deficit.

Broadly speaking, the region’s debt burden appears sustainable but Malaysia will need to spell out its plans to raise new tax revenue, like Indonesia and, more surprisingly, Vietnam.

Given fiscal rules and ratings pressure, some countries will need to sharply rein in spending in 2022-23 or dramatically increase revenue. Either option will require considerable political capital.

First published 17 November 2020.

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