Will COVID-19 Bring Recession and Debt Shock to Developing Asia?

April 3, 2020        Reading Time: 5 minutes

Reading Time: 5 min read

Image Credits: Jérémy Stenuit/ Unsplash

*Ganeshan Wignaraja

Developing Asia is famous for engineering1 V-shaped recoveries following the 1997 Asian financial crisis and the 2008 global financial crisis, as well as emerging2 as a key engine of global growth. The severity of the COVID-19 pandemic has sparked concerns about what shape global growth recovery will take and what it means for developing Asia.3

As of 1 April, China accounted4 for 9.6 per cent of global cases while South Asia accounts for 0.43 per cent. The rapid transmission of the infection is linked to5 the globalisation of the world economy and the advent of global travel. It has triggered a public health emergency and an economic shock. Stock markets across Asia have tumbled and China-centred global supply chains are collapsing.6 Travel bans and lockdowns have disrupted daily life. Unemployment and income inequality are rising.

Developing Asia grew at 5.6 per cent in 2019 and the International Monetary Fund (IMF) projected that this figure would uptick to 5.8 per cent in 2020.7 It is premature to assess the full economic impact of COVID-19 on developing Asia as economic data is still lacking and forecasting models are not adequately specified to analyse the disruption from the pandemic. The IMF will update its forecasts during the virtual Spring Meetings this year.

Projections made in a study 8 on the medium-term outlook on developing Asia’s growth and the prospects for middle-income countries are being updated using leading indicators (such as the manufacturing purchasing managers index) in an attempt to predict significant changes in economic activity.

This updating exercise suggests two economic scenarios for developing Asia and the world, with the depth of the downturn depending on the effectiveness in containing COVID-19.

The first scenario is a short outbreak and a limited economic impact on developing Asia. The spread of COVID-19 is checked within a few months through lockdowns, social distancing, virus testing, quarantine, and medical treatment. A vaccine is available ahead of schedule. Developing Asia’s growth could be between 4–4.5 per cent in 2020. This is above expected global growth of 2.3–2.5 per cent.9 An upturn in Asia could be likely in 2021. Yet Asia would still fall into recession as defined as two consecutive quarters of decline in a country’s real gross domestic product (GDP).

The second scenario is a long outbreak and a prolonged economic impact on developing Asia. In this scenario, COVID-19 continues to spread rapidly in Asia, containment measures are only partially successful, new mutations could bring a second wave and vaccine development takes longer than expected. Developing Asia’s growth may fall to 2–2.5 per cent in 2020 and remain sluggish in 2021. This is worse than the bottoming 10 of Asian growth to 2.8 per cent during the 1997 Asian financial crisis. Meanwhile, global growth could slip to 1–1.5 per cent in 2020. This would constitute a lengthy recession.11

As the pandemic is fast-moving with the epicentre spreading from China to Europe and the United States, the L-shaped second scenario seems more likely than the first. Facing such a bleak outlook, central banks in developing Asia have cut interest rates and are buying assets to support financial markets. Governments are undertaking fiscal stimulus and welfare measures.

Looking at Asian debt dynamics helps to grasp why central banks and governments are intervening. IMF technical work in the early 2000s 12 conservatively suggested prudential benchmarks on public debt of a debt-to-GDP ratio of 60 per cent for developed economies and 40 per cent for developing economies. While not officially endorsed by the IMF, it was thought that breaching these benchmarks would threaten fiscal sustainability.

With a government debt-to-GDP ratio of 58.8 per cent in 2019, developing Asia exceeds 13 the benchmark for developing countries and is approaching that for developed economies. China’s government debt-to-GDP ratio of 60.9 per cent in 2019 is argued to significantly understate 14 the total debt-to-GDP ratio of 303 per cent when corporate and household debt are included. The pandemic has led to concerns about high debt in state-owned enterprises and corporates held in a fragile shadow banking system.15

South Asia’s government debt-to-GDP ratio of 66.5 per cent in 2019 also exceeds IMF benchmarks, with outliers Pakistan and Sri Lanka at about 80 per cent. Interestingly, at least in Sri Lanka16 there is little evidence of a Chinese ‘debt trap’ due to commercial borrowing 17 for infrastructure projects. Graduation from concessional aid has left Sri Lanka more dependent on commercial borrowing from international capital markets.18

Indebted South Asian economies are now facing a triple whammy of rising borrowing costs, falling commodity prices and declining tourism receipts. This has put pressure on limited foreign exchange reserves and increased the risk of debt distress in South Asia.

The current COVID-19 trajectory points to a scenario of a long outbreak and a prolonged economic impact on developing Asia. Policymakers should upscale health interventions and loosen monetary and fiscal policy to save lives and mitigate a deep recession. In doing so, the risk of a debt shock needs to be factored into the policy calculus.


1Eichengreen, B. (2007). The Asian Crisis after Ten Years: Keynote address to the Claremont-Bologna-Singapore Center for Applied and Policy Economics International Economic Policy Forum on ìCapital Flows, Financial Markets and Economic Integration in Asia. University of California, Berkeley. [Online] Available at: https://eml.berkeley.edu/~eichengr/sing_keynote.pdf [Accessed 29 March 2020].

2Rhee, C. & Posen, A. eds. (2013). Responding To Financial Crisis: Lessons from Asia Then, The United States and Europe Now. Asian Development Bank and Peterson Institute for International Economics. [Online] Available at: https://www.piie.com/bookstore/responding-financial-crisis-lessons-asia-then-united-states-and-europe-now [Accessed 29 March 2020].

3Roubini, N. (2020). A Greater Depression? Project Syndicate. [Online] Available at: https://www.project-syndicate.org/commentary/coronavirus-greater-great-depression-by-nouriel-roubini-2020-03
[Accessed 27 March 2020].

4John Hopkins University and Medicine. Coronavirus COVID-19 Global Cases by the Center for Systems Science and Engineering (CSSE)  at Johns Hopkins University. [Online] Available at: https://coronavirus.jhu.edu/map.html [Accessed 27 March 2020].

5Farrell, H. & Newmand A. (2020). Will the Coronavirus End Globalization as We Know It? The Pandemic Is Exposing Market Vulnerabilities No One Knew Existed. Foreign Affairs. [Online] Available at: https://www.foreignaffairs.com/articles/2020-03-16/will-coronavirus-end-globalization-we-know-it
[Accessed 27 March 2020].

6Oeking, A. (2020). Coronavirus’ economic impact in East and Southeast Asia. East Asia Forum. [Online] Available at: https://www.eastasiaforum.org/2020/03/04/coronavirus-economic-impact-in-east-and-southeast-asia/ [Accessed 27 March 2020].

7World Economic Outlook. (2020). Tentative Stabilization, Sluggish Recovery? World Economic Outlook Update Reports.  [Online] Available at: https://www.imf.org/en/Publications/WEO/Issues/2020/01/20/weo-update-january2020
[Accessed 27 March 2020].

8Wignaraja, G. et al. (2018). Asia in 2025: Development prospects and challenges for middle-income countries. Overseas Development Institute (ODI). [Online] Available at: https://www.odi.org/sites/odi.org.uk/files/resource-documents/12434.pdf [Accessed 20 March 2020].

9Wignaraja, G. (2020). How bad might the coronavirus recession be in 2020? [Online] Daily FT. Available at: https://www.odi.org/sites/odi.org.uk/files/resource-documents/12434.pdf [Accessed 24 March 2020].

10IMF. (2020). Real GDP Growth. IMF Data Mapper. [Online] Available at: https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/DA
[Accessed 31 March 2020].

11Supra note 9.

12Chowdhury, A. & Islam, I. (2010). Is there an optimal debt-to-GDP ratio? VOX CEPR Policy Portal [Online] Available at: https://voxeu.org/debates/commentaries/there-optimal-debt-gdp-ratio
[Accessed 31 March 2020].

13IMF. (2020). General government gross debt: Percent of GDP. IMF Data Mapper. [Online] Available at: https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/OEMDC/ADVEC/WEOWORLD
[Accessed 31 March 2020].

14Asia Economics, Markets Desk, & Borsuk, R. eds. (2019). China’s debt tops 300% of GDP, now 15% of global total: IIF. [Online] Reuters. Available at: https://www.reuters.com/article/us-china-economy-debt/chinas-debt-tops-300-of-gdp-now-15-of-global-total-iif-idUSKCN1UD0KD
[Accessed 20 March 2020].

15Supra note 13.

16Wignaraja, G. et al. (2020). Chinese Investment and the BRI in Sri Lanka. Chatham House. [Online] Available at: https://www.chathamhouse.org/publication/chinese-investment-and-bri-sri-lanka [Accessed 31 March 2020].

17Weerakoon, D. (2019). Sri Lanka’s debt problem isn’t made in China. East Asia Forum. [Online] Available at: https://www.eastasiaforum.org/2019/02/28/sri-lankas-debt-problem-isnt-made-in-china/
[Accessed 27 March 2020].

18 Supra note 16.

*Ganeshan Wignaraja is the Executive Director of the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI) in Colombo. The opinions expressed in this piece are the author’s own and not the institutional views of LKI, and do not necessarily reflect the position of any other institution or individual with which the author is affiliated. This article was originally published in the East Asia Forum.

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