India, Bangladesh unlikely to cut subsidy bill as elections near: Moody’s

Bangladesh and India will have less impetus to reduce support for food and fuel subsidies as elections approach in 2023 and early 2024, according to rating agency Moody’s.

Elevated commodities prices will keep spending on food and fuel subsidies or other measures high. Social strains will keep deficits wider than before the pandemic. Social, political and economic pressures will delay fiscal tightening in several countries, it said.

“We expect the average fiscal deficit to be around 4% of GDP in 2023 compared with 1.9% in 2019”, Moody’s said in “Sovereigns–Asia-Pacific: 2023 outlook stable on debt sustainability but social risks will curb fiscal consolidation”.

Fiscal deficits for most governments are likely to be equivalent to or near their debt-stabilising fiscal balance. Debt burdens will continue to rise, or stabilise at higher levels in India and Malaysia.

Moody’s outlook for sovereign creditworthiness in Asia-Pacific (APAC) for 2023 is stable overall, compared with negative for other sovereigns. Debt sustainability and financial stability are relatively well anchored in the region, with contained government liquidity risks, broadly stable debt dynamics and generally sound external positions.

Output gaps would continue to close in countries where service-sector rebounds are underway, particularly tourism-oriented economies like Fiji and Thailand, and those that are midstream in post-pandemic recoveries like India, and the Philippines.

Negative credit effects would be less pronounced for frontier and emerging markets with a significant degree of concessional financing—an outlook that includes Bangladesh and Fiji. It will be less pronounced for those with deep domestic funding, India, Malaysia and Thailand included, where large institutional investor bases and banking systems have helped to anchor debt affordability.

Moody’s said the Gross Domestic Product (GDP) growth will stabilise close to potential levels and outperform other regions, despite higher global inflation and tighter financial conditions. Most sovereigns have begun fiscal consolidation, but social pressures are slowing progress.

Debt affordability will fall from generally robust levels as interest rates rise and will be manageable for most in the region. Key risks relate to weaker economic growth for longer in China.

The acute credit strains for lower-rated frontier markets that will continue to face heightened liquidity and currency depreciation pressures; and domestic politics and geopolitics, it added.