Pandemic will leave mess of deficits, debts in its wake

Stimulus spending necessary now, but it risks causing long-term imbalances and disruptions

The coronavirus pandemic threatens to open a Pandora's box of economic and financial problems - not that many would know it from some of the official guidance.

Even some international institutions are not stressing enough on how wide deficits and large debts can hurt growth in the long run.

It is hard to disagree with the International Monetary Fund's (IMF) recent grim forecast for the global economy this year, yet its prediction of a V-shaped recovery next year - a 5.8 per cent jump after a 3 per cent slump - seems a bit ambitious.

The IMF's assumption of a 2021 rebound is based on very low interest rates and stimulus measures continuing even after the coronavirus contagion starts to abate.

In other words, it wants policymakers to ramp up stimulus spending, taking on massive amounts of debt to fund health and economic rescue efforts, in the hope that the already elevated debt-to-gross domestic product (GDP) levels would begin to stabilise when growth picks up.

This is a major break from past IMF policy prescriptions that focused on fiscal austerity.

The IMF's own Global Debt Database shows that total debt, including both government and private, reached US$188 trillion (S$268 trillion) at the end of 2018, taking the average debt-to-GDP ratio to 226 per cent.

Low interest rates since the 2008 global financial crisis have encouraged government and companies to take on more debt, yet that has failed to boost growth back to levels seen before 2008.

The global economy will recover from the worst recession since the Great Depression of the 1930s, but recent additions to the debt pile mean growth will remain anaemic.

China, for example, spends the equivalent of about 14 per cent of its GDP on paying down debt.

That money could have gone into productive investments and job creation, in turn boosting economic growth. That explains why China's GDP expansion was slowing even before a trade war with the United States started in earnest.

While stimulus spending right now is necessary to save jobs and businesses from taking a severe hit from self-imposed lockdowns, it carries the risk of causing long-term imbalances and disruptions.


It would have been prudent for the IMF to highlight the risk of these fiscal and monetary policy actions running in the wrong direction.

Singapore does not need to take on any public debt to finance increased fiscal needs, says the writer, and that is why, despite a large stimulus - of about 12 per cent of GDP - and a historically high overall budgetary deficit for this year, rating agencies have kept its sovereign debt rating at AAA. ST PHOTO: KELVIN CHNG

Fitch Ratings believes the outbreak and ensuing recession will have long-term ramifications for the global economy in terms of growth, political risk and government policy.

The wider fiscal deficits and rising debt loads will force central banks to maintain their looser and unorthodox monetary policies for a longer period.

The increase in money supply can also induce abnormally high inflation, causing a policy dilemma for central banks worldwide.

Some central banks, like the US Federal Reserve and the European Central Bank (ECB), have not only cut short-term interest rates aggressively, but are also buying longer-term bonds and other debt instruments to pump money into the financial system to ensure it runs smoothly.

The policy measure - called quantitative easing (QE) - carries the risk of blurring the line between monetary and fiscal policies.

Very low or negative interest rates and QE force central banks to make a choice between price stability - their primary mandate - and GDP growth as well as fiscal sustainability.

The choice will become even starker if the abundance of money supply via stimulus and QE starts to boost inflation.

The interest rate policies of the Fed and ECB have implications for their currencies as well and in turn the potential to disrupt exchange rate regimes across the world, especially for legal tenders that are directly or indirectly pegged to the US dollar.


Global disruption in currency regimes is a significant risk for Singapore, where monetary policy is managed via exchange rate.

So far, policymakers have managed the Covid-19 crisis quite well, both in fiscal and monetary terms.

DBS Bank notes that the Singapore dollar is past its worst for this year and now has the scope to appreciate.

A stronger currency lowers the risk of imported inflation.

The local dollar bottomed this year at an intraday low of 1.4647 versus the greenback on March 23.

It has since been appreciating, closing last week at 1.4129 - up 3.7 per cent from the year's lowest point - and has been around that level this week.

The outperformance is despite the Monetary Authority of Singapore (MAS) taking an easier policy stance on March 30, allowing room for the currency to depreciate if needed.

While the Fed's QE and other measures boosting availability of US dollars helped, the Singdollar is also taking some respite from the country's strong fiscal position, which puts at rest any concerns about rising fiscal deficit.

First of all, Singapore has accumulated significant Budget surpluses over the past few years.

It also has significant reserves, estimated earlier this month by DBS at $503 billion.

These include assets with Temasek worth $313 billion, approximately $140 billion with GIC and another $50 billion of deposits placed with the MAS.

This compares with about $188 billion in outstanding Singapore government securities and treasury bills, putting the Government in a comfortable net debt position with assets exceeding liabilities by a large amount.

So Singapore is in no need to take on any public debt to finance increased fiscal needs.

And that is why, despite a large stimulus - of about 12 per cent of GDP - and a historically high overall budgetary deficit for this year, rating agencies have kept its sovereign debt rating at AAA.

Comparatively, other economies have not fared as well, with Australia's rating outlook cut to negative by S&P Global Ratings.

Fitch expects rising debt servicing burdens will hurt economic growth, especially in developing economies such as Brazil, India, Malaysia and South Africa.

Given that Singapore is a small, open and highly trade-dependent economy, problems at its major trading partners can be transmitted via financial markets and hurt its economic outlook by affecting exports and manufacturing.

Hopefully, Singapore will remain one of the few economies where a strong fiscal position will continue to blunt the impact of a global contagion.

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A version of this article appeared in the print edition of The Straits Times on April 16, 2020, with the headline Pandemic will leave mess of deficits, debts in its wake. Subscribe