KUALA LUMPUR – The economic damage in emerging Asia from the sovereign debt crisis is less severe compared with that in advanced economies given its low initial debt burdens and ample fiscal space, Moody’s Analytics said.
The research firm said while emerging Asian economies also experienced capital flight, falling exchange rates, and rising inflation in the initial stages of the crisis, tight trade links with China and the United States helped hitch the region to recovery in advanced economies.
“Though India enters the crisis with high outstanding debt levels, the low international exposure of its financial sector and near-total domestic ownership of government debt limits contagion, while its relatively more insulated domestic economy suffers less from global financial turmoil,” it said in a statement.
According to Moody’s Analytics, the crisis in advanced economies and emerging Asia will abate once policy and business leaders grow confident that debt relief will stem financial contagion from emerging market defaults.
“The genesis for a darker scenario likely lies with China. Although low government debt levels, ample fiscal space, and near-total domestic ownership of sovereign debt make a sovereign crisis unlikely, the highly leveraged household and corporate sectors could provide kindling, especially if efforts to curb lending do not go as planned.
“A China debt crisis would deal a heavier blow to both advanced and emerging economies alike and would spell greater trouble for emerging Asia. Given growing financial linkages between China and other advanced and emerging economies, the fallout for the global economy would be difficult to contain,” it said.
On the Malaysian economy, Moody’s Analytics said that similar to several larger emerging markets running out of fiscal space, Malaysia’s borrowing capacity had thinned as a consequence of rising deficits and debt in the past five years.
Besides Malaysia, it said Mexico, Brazil, Colombia, and Russia were also running out of fiscal space.
Moody’s noted that Malaysia’s debt to gross domestic product (GDP) was at 64% as at the first quarter of 2021, while its maximum sustainable debt was 35% of GDP. – Bernama, June 14, 2021
