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At the end of the 2021/2022 fiscal year, India’s real GDP exceeded its pre-crisis level, and economic activity indicators were positive in April and May 2022. Activity has been supported by a recovery in domestic demand and dynamic exports. Faced with rising inflation and downward pressure on the rupee (due to capital outflows and a widening trade deficit), the monetary authorities raised their policy rates in May and June – further increases are expected. Conversely, fiscal policy is more expansionary than anticipated. Multilateral institutions and India’s Central Bank have revised their growth forecasts downwards (between 6.9% and 7.5% for the 2022/2023 fiscal year vs. 8.7% in the previous year)
The Covid-19 pandemic weakened Indonesia’s economy. Two years after the crisis, real GDP has returned to 2019 levels, but the labour market is still weak, the poverty rate is higher than before the crisis and investment remains subdued. According to the World Bank, the pandemic’s lasting impact on education and the labour market will cost the country 0.1 points of its long-term growth potential. Today, Indonesia must deal with a new unfavourable economic environment as commodity prices have dramatically increased due to the conflict in Ukraine and sanctions against Russia. Although growth is bound to be squeezed by the Ukrainian conflict, Indonesia’s external accounts should remain healthy and inflationary pressures should remain moderate
The international economic and financial environment is not helpful for the Indian economy. Although India produces and exports wheat, it will suffer from surging commodity prices. Slowing growth is likely to hamper the government’s announced fiscal consolidation. The government will be forced to increase fertiliser subsidies sharply if it wants to contain the increase in domestic food prices, which make up almost 46% of consumer spending. India will not be able to avoid a significant deterioration in its current account deficit driven by higher oil prices and downward pressure on the rupee, especially if recent portfolio investment outflows continue. The results of the recent regional elections should ensure a degree of political stability at least until the 2024 general election
After a modest growth in 2021, Malaysia’s economy is set to recover more strongly in 2022. It will be supported by firm domestic demand, an expansionary fiscal policy and the reopening of Malaysia’s borders to tourists. The country is an exporter of commodities – mainly oil and palm oil – and should benefit from higher international prices, without being directly affected by the conflict in Ukraine. Thanks to the additional revenue from higher oil prices, the government should be able to take on most of the burden of higher inflation to prevent problems for households whose finances have already been weakened by the 2020 crisis. Another key uncertainty regarding economic growth is how long and how severe Chinese lockdowns will be, since they could drag down Malaysian exports.
At first glance, Indonesia consolidated its external accounts in 2021. Foreign exchange reserves amounted to USD 131 bn, the equivalent of 8.3 months of imports of goods and services, while the external debt came to only 35% of GDP, which is less than the pre-Covid level. Moreover, the current account showed a slight surplus (0.3% of GDP) for the first time since 2011. The strong performance of the current account reflects the steep increase in the trade surplus, which swelled to 4.1% of GDP, from an average of 1.3% over the past five years. Although imports increased by nearly 6 points of GDP compared to 2020, Indonesia reported a sharp rise in exports, driven up by higher commodity prices for coal, iron ore and palm oil
Economic growth is still vulnerable to another epidemic wave as less than 50% of the population was fully vaccinated at the end of December 2021. Activity has already been losing momentum since December, and it could be curbed even further by the new epidemic wave that swept the country in January at a time when labour market conditions are still deteriorated. Inflation is another risk factor looming over the recovery. Not only does it reduce household purchasing power, but it could also convince the monetary authorities to raise policy rates
After showing rather strong resilience to the pandemic and the collapse of international oil prices in 2020, the Russian economy rebounded strongly in 2021. Yet two major risks are currently threatening growth: inflation and a tightening of international sanctions. These sanctions could even add to the inflationary risk. Nonetheless, the government has the financial capacity to support the economy, with solid public finances and low refinancing risks. Moreover, even if international sanctions were tightened to the point that foreign investors were denied access to Russia’s secondary debt market, the government would still be able to finance itself on the domestic market.
India’s economic and financial situation has consolidated slightly since the summer. After contracting sharply in Q2 following the spread of the Covid-19 pandemic, economic activity rebounded strongly in Q3. Even so, at end-September, only 20% of the population was fully vaccinated, which means the country is not sheltered from a third wave of the pandemic. Growth prospects are still looking good for the rest of the year. Household consumption will benefit from falling inflation and higher government spending. Business leaders are still confident, even though they are taking a cautious approach to investment plans. Borrowing rates are low, and the banking sector, though still fragile, is doing better than it was three years ago
Although the political situation has stabilised somewhat following the appointment of a new prime minister, the economic environment has deteriorated. The spread of the Covid-19 pandemic in April forced the government to reintroduce lockdown measures that led to an economic contraction in Q2 2021. The situation is unlikely to improve before Q4, once health restrictions are lifted thanks to an accelerated vaccination campaign. In an attempt to boost growth, the government launched a series of economic support plans, even though fiscal revenue fell short of the full-year target in the first seven months of the year. Consequently, according to the Ministry of Finances, the fiscal deficit is expected to swell to between 6
India’s public finances remain fragile, though strengthening over the first four months of the current fiscal year (to 31 March 2022). The central government’s fiscal deficit hit a high of 9.2% of GDP at the end of the 2020-21 fiscal year from an average of 3.8% of GDP over the previous five years. Over the same period, public debt has steeply risen, and is estimated to have reached a high of 88% of GDP in March 2021. The rapid deterioration of the public finances is the result of increased public spending in response to the Covid-19 crisis, but is also due to an extremely low fiscal base (total government’s receipts only reached 8.6% of GDP even before the pandemic). Under such circumstances, one might have feared a deterioration of the India’s sovereign rating
The Covid-19 crisis did not spare India, and like many of the emerging economies, the country’s economic and social situation has deteriorated sharply. Yet India’s situation had already begun to deteriorate well before the onset of the pandemic, which only accentuated the country’s weaknesses. The very sharp contraction in GDP triggered by the Covid-19 pandemic highlights the economy’s structural vulnerabilities, especially the large number of workers without social protection. With the nationwide lockdown in April and May 2020, 75 million Indians fell below the poverty line, and there is reason to fear that the second wave could have a similar impact
The second wave of the pandemic seems to have passed after new cases peaked in May. Economic activity is unlikely to contract as much as it did last year, and the decline should be limited to the second quarter. Yet the second wave is estimated to have cost more than 2 percentage points of GDP, and it comes at a time when households are still struggling to recover from the impact of the first wave. In 2020, 75 million people dropped below the poverty line. Moreover, the rebound expected this year might not suffice to stabilise the public debt ratio, which could lead the rating agencies to downgrade India’s sovereign rating. In this very uncertain environment, the rupee is not benefitting from the strength of India’s external accounts.
After a modest contraction in 2020, the Russian economy has registered a solid growth rebound since March 2021 driven by the strength of domestic demand and exports. The third wave of the epidemic seen since June, alongside strong inflationary pressure and the resulting tightening of monetary policy, could, however, hold back the recovery. This said, the threats to the economy remain under control. Public finances have been boosted by a sharp rise in global oil prices and the debt refinancing risk is limited despite the latest US sanctions. Lastly, foreign exchange reserves cover the totality of external debt.
The economic recovery could be weakened by a second wave of Covid-19 and a fresh surge in inflation. With the government seeking to step up the pace of reforms to support growth over the medium term and improve the business environment, the number of protests against the moves is mounting, with protestors’ ire directed particularly at the privatisations that the government is counting on to cut its budget deficit. In the banking sector, banks currently are able to deal with the expected rise in credit risk. Nevertheless, in order to support a resumption of lending growth, a new injection of capital into state-owned banks has already been planned, alongside the creation of a defeasance structure.
Having contracted by 2.1% in 2020, the Indonesian economy is likely to see only a modest recovery in 2021. Domestic demand is struggling to recover. Consumer sentiment remains weak and any resurgence in the pandemic could undermine the recovery, at a time when a very low percentage of the population has been vaccinated. Moreover, despite the highly expansionary monetary policy, bank lending has continued on its downward trend. The financial position of Indonesian companies prior to the Covid-19 crisis was more fragile than those of ASEAN peers, and they are likely to seek to consolidate their positions rather than invest in an uncertain future. The banking sector remains solid and well-placed to deal with an expected increase in credit risk.
In Q4 2020, the third quarter of the 2020/21 fiscal year to 31 March 2021, India officially came out of recession. Real GDP was 0.4% higher than in Q4 2019. The recovery has been driven by an increase in government investment and a rebuilding of business inventories. In contrast, consumer spending – the biggest component of GDP – fell, whilst inflationary pressures have eased since November. Activity in the services sector was still down by 1%, while the agricultural and construction sectors recorded an acceleration, as did manufacturing, albeit to a lesser extent. Economic indicators for January remain on the right track
The economy has rebounded strongly since July, driven by the recovery in industry, which then spread to the services sector starting in October. Although the recovery still seems to be fragile, the central bank has raised its growth forecast for fiscal year 2020/2021 to -7.5%. Fiscal year 2021/2022 is expected to see a major automatic rebound in growth. Lacking the means to support growth through a fiscal stimulus package, the government has set out to create a more propitious environment for investment that would enable medium-term growth to return to a pace of about 7%. The latest reforms are working in this direction. Yet passing reform measures does not guarantee that they will be implemented, much less that they will be successful.
Malaysia is one of the emerging Asian countries hit hardest by the Covid-19 crisis. Although a recovery is underway, it is bound to be hampered by new lockdowns in Q4 2020 and January 2021. Public finances have deteriorated sharply, but the government does not seem inclined to pursue fiscal consolidation. It is giving priority to the economic recovery and support for the most fragile households. The public debt ratio will continue to deteriorate, and in December, the rating agency Fitch downgraded Malaysia’s sovereign rating. Yet refinancing risks are moderate: the debt structure is not very risky and the country has a large domestic bond market. Malaysia will continue to report a current account surplus and has a solid banking sector.
After contracting 8% year-on-year (y/y) in Q2 2020, Russian economic growth is struggling to recover. In August, monthly GDP was still down 4.3% y/y. Household confidence and the business climate are both morose, and activity has barely rebounded. Adjusted for seasonal variations, industrial output was still 7% lower in August than the year-end 2019 level, even though oil production was increased as of 1 August as part of OPEC agreements. According to survey data, we should not expect to see a significant rebound in September either (PMI in manufacturing dropped below the 50 threshold separating expansion from contraction). Corporate investment continues to slump, as illustrated by the contraction in capital goods imports, and is still 5% below the 2019 average
Between April and June 2020, India’s economy contracted by nearly 24% compared to the same period last year. This unprecedented contraction can be attributed to the collapse of domestic demand. Although the economy has rebounded since June, it is still fragile and well below pre-crisis levels, prior to the outbreak of the Covid-19 pandemic. The central bank and government did not have much support capacity, but even this has been eroded by higher prices and a drop-off in fiscal revenue. Public debt is expected to swell to nearly 89% of GDP, and will strain the country’s future development projects, especially given that government spending contributed to nearly 30% of growth last year.
For the first time since the 1998 crisis, Indonesia is expected to enter recession in 2020. In Q2 2020, the economy contracted by more than 5%, and the recovery should be slow. Domestic demand is struggling to pick up, and Jakarta has just been put under a partial lockdown again. Fiscal support has been slow in coming: planned fiscal spending still hasn’t materialised in the first seven months of the year. Even so, the deficit is under control and the central bank is acting as the lender of last resort. In H2 2020, the government hopes to consolidate the recovery via a massive support package for low-income households. Even though inflation is under tight control, the poverty rate could reach 11.6% according to the World Bank (vs 9.2% in 2019).
India should report an unprecedented contraction in real GDP this year. The big question is how strong will it rebound thereafter? The rating agencies have begun to doubt whether India will return to its potential growth rate in the years ahead because its economic slowdown began much earlier than the Covid-19 crisis. India’s slowdown dates back at least to 2018, and could even be an extension of the 2009 financial crisis. Since 2014, real GDP growth seems to have been driven solely by positive external shocks, creating the illusion of robust growth. Yet the banking sector is still much too fragile to restore GDP to the growth rates of the past.
The Russian economy is more solid today than it was five years ago. After the 2014-15 crisis, the government managed to rebuild its sovereign wealth fund, which is now enabling it to offset the loss of oil revenue. Public finances are less dependent on oil revenues, thanks to the VAT increase in 2019, and the government should have no trouble meeting its short-term commitments. Yet lockdown restrictions and the collapse of commodity prices will have a big impact on both growth and the banking sector, which is still fragile, although it is less vulnerable to a forex shock.
In fiscal year 2019/20 (ended in March), India’s GDP growth slowed sharply to only 4.2%, and growth prospects for the current fiscal year look extremely bleak. The slowdown in 2019/20 GDP is especially alarming considering that it predates the outbreak of the Covid-19 pandemic. The economy has slowed since 2018, and even without taking into account the impact of Covid 19, growth was set to fall far short of its long-term potential of 7.3% in the years ahead. As a result, Moody’s has downgraded India’s sovereign rating. The latest economic indicators suggest a very severe contraction between April and June 2020. In April, electrical power generation and cement production fell 22.7% and 86% year-on-year, respectively, while merchandise transport plummeted 35%
