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

Bangladesh and India will likely reduce support for food and fuel subsidies as elections approach in 2023 and early 2024, according to a recent report by rating agency Moody's.

Hike in commodities prices will keep spending on food and fuel subsidies or other measures high, Moody's said in its "Sovereigns – Asia-Pacific: 2023 outlook stable on debt sustainability but social risks will curb fiscal consolidation".

"We expect the average fiscal deficit to be around 4% of GDP in 2023 compared with 1.9% in 2019", the report adds.

Moody's outlook for sovereign creditworthiness in Asia-Pacific (APAC) for 2023 is stable overall, compared with negative for other sovereigns, reports Business Standard citing the report.  

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.

The report said that social, political and economic pressures will delay fiscal tightening in several countries; social strains will keep deficits wider than before the pandemic. 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, it added.

Moody's also said that output gaps would continue to close in countries where service-sector rebounds are underway - particularly tourism-oriented economies and those that are midstream in post-pandemic recoveries.

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.

Countries where large institutional investor bases and banking systems have helped to anchor debt affordability, and have deep domestic funding, adverse effects will be less pronounced in those, the report states.

Despite higher global inflation and tighter financial conditions, Moody's said the Gross Domestic Product (GDP) growth will stabilise close to potential levels in Asia-Pacific and outperform other regions.  

Debt affordability will fall from generally robust levels as interest rates rise and will be manageable for most in the region.

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.

The report also added that most sovereigns have begun fiscal consolidation, but social pressures are slowing progress.