A money changer holds a fan of the Cambodian riel currency in a file photo. Image: Facebook

From the “too big to fail” mantra during the 2008 financial collapse, to the debate over capital controls in the 1997-98 Asian financial crisis, every economic calamity is dogged by the question of how much state intervention should be applied to ease market pains.

Today’s pandemic-induced recession, however, is unique in that it was mainly caused by government-imposed lockdowns followed by near-unprecedented fiscal measures to keep their economies and populations afloat.

The US has doubled its national debt from US$4 trillion to $8 trillion since February, with more bailout funds likely to come. Japan has earmarked more than 21% in “stimulus packages” with another round of measures in order.

Southeast Asia is no exception with most governments rolling out a range of measures from cash subsidies to the poor, tax holidays for businesses, grace periods on loans and rents, central bank rate cuts and even tourism subsidies.

Vietnam’s Covid-19 stimulus package announced in March equates to 3.6% of GDP. Its economy is expected to see less than 1% positive growth this year, one of the few economies in the region that isn’t projected to contract in 2020.

Singapore’s stimulus measures are expected to cost the city-state the equivalent of nearly 20% of GDP, while it is expected to see its worst growth record since independence was achieved in 1965. Second quarter results saw GDP shrink by a record 41.2%.

The medium and long-term impact of these big-money state interventions has yet to be seen. This is partly because most state handouts are targeted as “survival packages” that aim to keep businesses alive during what policymakers hope will be only temporary tough times.

Shoppers stand apart as social distancing measures amid concerns over the Covid-19 epidemic, while queueing outside a supermarket in Manila on March 17, 2020. Photo: AFP/Maria Tan

But what happens when state bailouts end and businesses must fend for themselves again is still anyone’s guess. While some will surivive on limited profits in hopes of an upswing in 2021, many others are expected to capsize as soon as state money is removed.   

“If a lot of companies are not able to survive … you’ll have this million-dollar question of how do you deal with these ‘zombie companies’,” Piyush Gupta, group chief executive of Singaporean bank DBS, Southeast Asia’s largest bank, recently said in a televised interview.

Very soon, he went on, regional governments will face perhaps their hardest decision yet. “Do you keep putting money [into the market]…using public finances to support companies or do you let creative destruction happen?” Gupta queried.

As the pandemic shows few signs of easing, regional governments now face a crucial policy dilemma: spend more and risk fiscal blowouts, or stand by as businesses go bust and their economies spiral downward.

Yet the question isn’t really whether there should be more debt or not. During these locust months, ever more people are struggling with unemployment or falling revenues. At the same time, household debts are rising.

Thailand’s central bank, for instance, which expects the economy to contract by 8.1% this year, also reckons that household debt will climb from nearly 80% of GDP in 2019 to upwards of 90% by the close of 2020, marking an 18-year high. 

At the same time, fiscal deficits are climbing to historic highs as plummeting tax collection coupled with increased expenditure hits state coffers regionwide.

For the region’s poorer states, which are already heavily indebted and have limited means for improving state finances, there is less wiggle room and likely no chance of a second tranche of state rescue money.  

A face mask-wearing Acleda Bank employee counts US currency inside the bank in Phnom Penh on May 25, 2020. Photo: AFP/Tang Chhin Sothy

In Cambodia, financial confusion abounds as the government said in March it had an excess $2 billion in fiscal reserves and then week later moved to halve the national budget in 2021.

The government has since gone hat in hand to international donors for loans, including a $250 concessional loan from the Asian Development Bank.

Other small states are being affected by arbitrary caps on state debt. Laos’ communist government has imposed austerity to bring national debt down from a peak of 60% of GDP in late 2017, yet all that belt-tightening now risks coming undone.

Fitch Ratings in May downgraded Laos’ outlook to “negative” from “stable” because Vientiane is almost certain not to be able to make its debt repayments this year.

Indeed, according to the agency, Laos only has foreign exchange reserves worth $1 billion, yet its debt repayments for this year are valued at $900 million and its state revenue is set to be cut by a quarter.

Analysts consider it a warning sign when external debt to gross national income (GNI) climbs above 60% or external debt-to-export ratios go above 150%, according to Malcolm Cook, a visiting senior fellow at the ISEAS–Yusof Ishak Institute.

Three Southeast Asian states fit that bill, according to the World Bank Group’s  International Debt Statistics 2020 report. Laos suffers under both measures, with external debt to gross national income (GNI) at 90% and external debt-to-export at a whopping 245%, according to the report.

A woman wearing a face mask amid concerns about the spread of the Covid-19 coronavirus waits to cross the street in front of a poster for the Disney film “Mulan” in Vientiane on March 11, 2020. Photo: AFP/ Mladen Antonov

The same research showed Cambodia’s external debt to gross national income (GNI) is 67%, and Indonesia’s external debt-to-exports is 170%, which should be a concern for both. Worryingly, the Bank’s analysis was conducted before the Covid-19 crisis struck, meaning the profiled countries’ finances are in even direr straits.

Yet even the region’s richer states will struggle to afford another tranche of stimulus measures. Malaysia’s fiscal deficit this year is likely to be higher than 7%, which will make it difficult if another round of stimulus packages are needed, the World Bank wrote last month. Malaysia also faces the problem of falling oil prices.

“For Malaysia…the rise in public debt might force the government into fiscal austerity after the crisis,” reads a recent report by Raphie Hayat, of RaboResearch Global Economics & Market.

Vietnam’s fiscal deficit is forecast to be around 6.4% of GDP, double last year’s figure, according to a recent forecast by Fitch Solutions, a subsidiary of the Fitch Group.

Indonesia’s central bank has taken the rather unconventional approach, after a rapid change of the law in March, of purchasing state bonds to provide the government with more money. Yet Jakarta is still expected to face a deficit of 6.5% of GDP in 2020, up from 2.2% last year.

Fitch Solutions wrote earlier this month that while the central bank’s purchase of bonds has produced additional money for the state worth around 2.4% of GDP, “monetization of the fiscal deficit could cause challenges.”

That would be particularly so, it added, “if it were to continue beyond the current year, contrary to the authorities’ assertion that the move is a one-off driven by the unusual circumstances of the pandemic.”

It said such monetary policy could escalate inflation and also “would raise the potential for government interference in monetary policymaking, and could undermine investor confidence.”

A larger than life rupiah coin at Indonesia’s central bank. Image: Twitter

Rising public debt will push up borrowing costs for most Southeast Asian states, noted Hayat, of RaboResearch Global Economics & Market.

“The result will be that [Southeast Asian] governments have to spend a larger part of their revenue on servicing debt, which in some countries is already sizable,” he added.

“This leaves less room for investments and stimulus going forward. Government finances will thus be in a weaker position after this crisis to fight whatever crisis lies in the future.”