Widening Covid-19 wealth gap will pressure public spending, debt, say reports

THE Covid-19 pandemic is widening wealth and income inequality in Asia, analysts have warned, with virus control and an economic downturn tipped to put pressure on Asia-Pacific sovereign debt.

Public funding needs will therefore either push up bond yields or force unconventional monetary policies that may clash with inflation targets, said an ANZ note on Tuesday.

Indeed, Moody's Investors Service has a negative outlook on Asia-Pacific sovereign credit-worthiness this year, based on its expectations for the next 12 to 18 months.

Debt burdens in "a significant number" of countries, including the Philippines, will keep rising for the medium term, Moody's analysts said in a separate report. In Malaysia and Thailand, government debt is tipped to peak in 2021.

Meanwhile, debt affordability, as measured by interest payments relative to revenue, is expected to deteriorate, especially in emerging and frontier markets such as Indonesia, the Philippines and Thailand.

To be sure, Laos could see stronger debt affordability on the back of relatively weak levels, as well as financing at low or concessional rates. But the Lao government also faces significant liquidity risks as public debt servicing will mature, Moody's noted.

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The ANZ team identified three main causes for widening inequality amid Covid-19: Firstly, industries that largely employ low-wage, low-skilled workers, young people and women have been hardest-hit, such as tourism, retail and domestic labour.

Secondly, salaries are expected to suffer as business performance declines, with wages already lagging behind productivity, in data from Thailand and Singapore.

Thirdly, higher-income groups hold more equities, which have rebounded, while savings in bank deposits, owned by lower-income groups, are stymied by low interest rates.

The ANZ team concluded: "The ongoing and the anticipated rise in income and wealth inequality in the aftermath of the Covid-19 will become a critical issue for policymakers, so much so that fiscal policies will need to become structurally more expansionary."

Similarly, the Moody's analysts said: "Over the medium term, shifts in national development priorities and countries' roles in global supply chains will drive new economic growth models. "Social and political tension, fuelled by rising inequality amid the pandemic, will present a further challenge for recovery and reform."