Moderator:  Calla Wiemer (


Economics of the Pandemic, 2021 Preliminary

This post is associated with a presentation in the ACAES session at the 2022 Allied Social Science Association Annual Meeting, program here. Youtube recording here.

A previous post analyzing the economics of the pandemic for 2020 documented widely divergent experiences in Asia with respect to case numbers, mobility loss, and export impact, and showed all three of these factors to be systematically related to GDP growth. A follow-up post on fiscal policy found those economies with ample fiscal space used it to ramp up spending, and a post on monetary policy showed central bank balance sheets expanding under supportive global conditions. In this post, we revisit the analytics using preliminary data for 2021 for 14 Asian economies.

Chart 1: GDP Growth in 2021 vs 2020

Data source: IMF WEO.

In the second year of the pandemic, much has changed. No longer do case numbers, mobility loss, and export performance exhibit any relationship to GDP growth. One might wonder whether this is because base effects dominate for 2021 in the sense that those economies that contracted most sharply in 2020 might have been able to achieve more rapid growth in the following year simply by rebounding from their depths. But this is not the case, as Chart 1 demonstrates. Some economies hit hard in 2020 grew only modestly in 2021 leaving output still well below 2019 levels, Thailand being a case in point. By contrast, India suffered a deep contraction in 2020 yet emerged strongly in 2021. China and Taiwan performed well, under the circumstances, in both 2020 and 2021. The upshot, then, is that the story of GDP growth in 2021 is more complicated than the simple metrics applied to 2020 are able to discern.

A likely reason is that macro policy has had time to produce results by year two of the pandemic. As shown in the fiscal policy post for 2020, government spending increases ranged from negligible for Bangladesh and Malaysia to nearly 80 percent for Singapore, with differences in policy response deriving in large part from differences in fiscal space. Table 1 extends the analysis of fiscal space presented in the previous post using updated figures for 2020 and the latest projections for 2021 and beyond. Fiscal space depends on past accumulation of public debt relative to GDP and, insofar as the goal is to sustain a given debt-to-GDP ratio, on the interest rate and the GDP growth rate. Debt-to-GDP ratios for 2020 range from near zero for Hong Kong to 254 percent for Japan. At what level debt loads become problematic depends on many factors. Debt ratios for India at 89.6 percent, Malaysia at 67.4 percent, and Indonesia at 36.6 percent may be more concerning than ratios for Japan at 254.1 percent and Singapore at 154.9 percent due to differences in financing costs and potential wariness of creditors.

Table 1: Fiscal Space Determinants & Utilization, 2020-2025

The nominal interest rate is on ten-year government bonds. The real interest rate is based on inflation projections for 2021-2024.


Data sources: Nominal interest rates, World Government Bonds; all else, IMF WEO.

Let us set aside the matter of danger thresholds and focus on the effect of the pandemic on increases in debt ratios. The debt-to-GDP ratio (d) will remain constant when the ratio of the primary balance (which excludes interest payments) to GDP is equal to d(r-g)/(1+g) where r is the real interest rate and g is the GDP growth rate. Hence, a lower interest rate and a higher GDP growth rate allow for larger deficits while still preserving a constant debt ratio. Table 1 shows that actual deficits in terms of the primary balance relative to GDP exceeded the sustainability level for all 14 economies in 2020 and are projected to do so again in 2021 for all but Singapore and Taiwan. Apart from these two plus Japan, rising debt ratios stretch out through 2022-2025 as deficits continue to exceed the sustainability level.

Interest rates on government borrowing are a rough indicator of how credit markets perceive debt sustainability risks. Real interest rates are highest for Indonesia at 3.4 percent, Pakistan at 3.2 percent, the Philippines at 2.1 percent, and Bangladesh at 2.0 percent. While none of these countries shows notably high debt levels at present, all are on trajectories that will have their debt ratios rising in coming years. This means their space for fiscal stimulus is tightening.

Fiscal policy space is largely a legacy of past domestic policy choices. Monetary policy space, by contrast, is heavily influenced by global capital markets which are in turn whipsawed by US monetary policy. The monetary policy post for 2020 found global conditions supportive of stimulus in view of buoyant exchange rates against central bank acquisition of reserves. But space has tightened in 2021, as revealed by updated information for the first eight months of 2021 shown in Chart 2 below.

 Chart 2: Official Reserves vs Exchange Rate, 2008-2021 (Jan-Aug)

Note: Change in reserves is measured as balance of payments flows relative to reserve stocks.

Data Sources:  Exchange rates, IMF International Financial Statistics; reserves, IMF Balance of Payments and International Investment Statistics and for Taiwan, Central Bank of the Republic of China.

The vertical axis measures central bank acquisition of reserves (as represented on the balance of payments) relative to reserve stocks. The horizontal axis measures depreciation of the local currency relative to the US dollar. In 2020, all economies under analysis lay above the horizontal axis with most in the upper left quadrant. This means that central banks were engaged in expansionary buying of foreign exchange met with local currency issuance, either leaning against appreciation or leaning into depreciation. As of 2021, the Philippines, Malaysia, and Thailand have moved into the lower right quadrant. Their central banks are thus buying local currency to ward off depreciation for a contractionary monetary stance. More generally, most economies in the sample have come to find themselves positioned to the right of the vertical axis indicating their currencies are depreciating, albeit with central banks leaning into that depreciation for some. Only China, Taiwan, and Pakistan have stayed in the upper left quadrant leaning against currency appreciation. In general then, global capital market conditions have become less supportive of Asian economies pursuing monetary stimulus.

Globally, the appeal of investing in Asia is much influenced by credit conditions in the US. Should the US tighten credit in response to inflation heating up, Asian economies will come under pressure to follow suit to keep interest rates competitive. Within the framework of Chart 2, this implies movement toward the lower right quadrant with central banks selling off reserves and shrinking their balance sheets to forestall currency depreciation. Unfortunately, for the rest of the world, the timing of a tightening will not be strictly a matter of choice.

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