This article first appeared in Forum, The Edge Malaysia Weekly on November 9, 2020 - November 15, 2020

The Covid-19 pandemic continues its unrelenting assault on the global economy. In turn, governments have released fiscal bazookas to prevent their economies from collapsing. Even countries with dicey fiscal conditions continue to dish out as much fiscal support as they can during these unprecedented times.

In this region, Malaysia’s stimulus measures have accounted for 20% of its GDP. Similarly, Singapore’s stimulus package is roughly 20% of its national output, while that of Thailand has amounted to about 16% of its GDP.

This is unsurprising, considering that monetary policies have been pushed to the limit in some countries. Interest rates have been dragged down to the ground in some cases, hitting almost zero and even negative territory in some European economies. Similarly, in Asia, rates have been cut to historical lows. Yet, there have been no signs of a sustainable economic rebound.

In Indonesia, the central bank recently resisted cutting interest rates further after its seven-day reverse repo was trimmed to a historical low of 4% in mid-July. Signs are aplenty that Bank Indonesia is now focusing on unconventional ways to revive its economy, one of which is through direct purchases of government bonds.

Some economists believe that such purchases act to support the government’s economic stimulus measures. According to reports, Bank Indonesia governor Perry Warjiyo believes this unconventional measure is proving rather effective in supporting the economy. Of course, such measures have their pros and cons.

Singapore views the situation in a similar manner. Not relying on an interest rate policy, its policymakers are instead banking on fiscal measures to cushion the economy. Singapore’s currency band, which has been adjusted via reductions to its midpoint and slope of appreciation or depreciation to support the economy, is not expected to change further in the near term. Instead, the fiscal authorities are expected to continue to shoulder the economic burden going forward.

There is indeed a general consensus that more fiscal measures are needed to spur the economy this time around. This is due in part to the unprecedented nature of the crisis, as well as the limitations of monetary policy in propping up the economy as it did in the past. Expanding fiscal measures is truly a step in the right direction.

Notwithstanding the nearly unanimous vote for fiscal measures, one should bear in mind that the repercussions of fiscal support would differ from one country to another. Indeed, the financial markets treat fiscal measures differently from country to country. This is because investors form their own assessments of the prospects of these economies following the implementation of the fiscal measures.

On top of that, reactions by global credit rating agencies, each basing its assessment on its own methodology, would influence investors’ response in the financial markets. Some of us can recall how violently financial markets reacted during past crises, following the exodus of portfolio capital from various economies because of sovereign rating downgrades. We can also remember how the reversals of portfolio capital crushed economies during, for example, the 1997/98 Asian financial crisis.

In this region, a country such as Singapore can spend billions of dollars to support its economy without investors batting an eyelid. For those with fiscal deficits such as Indonesia and Malaysia, however, higher-than-normal spending would cause some investors to become jittery, even when they know that is what is needed during unprecedented times like these. Of course, investors would react even more dramatically to countries with twin deficits (negative current account and fiscal balances).

Nevertheless, the usefulness of a country’s sovereign rating is highly debatable. Yes, it is merely an assessment of the ability and willingness of a sovereign to pay its obligations in full and on time. Those who are familiar know that sovereign ratings do not say anything about government policies, nor are they a report card of a country. Yet, the financial markets react to them, especially when adjustments happen among certain groups of economies (for example, emerging-market economies).

For advanced nations such as the US, a downgrade in the sovereign rating hardly affects investors’ appetite for US-denominated assets. This is despite the country’s yawning current account and budget deficits. As such, expanding fiscal measures to counter the negative impact of, say, Covid-19 will not do much harm to its financial market in the near term.

However, it will not be the same for emerging-market economies that investors perceive very differently. Countries such as Indonesia and India have had their currencies depressed because of their twin deficits. Any global development that exacerbates these conditions will surely catch international credit rating agencies’ attention and cause increased financial market volatility.

So, while many countries wish to continue expanding their fiscal support, the possibility of adverse financial market repercussions may prevent them from making such bold moves. This is a sad reality that explains why some quarters are against free movements of portfolio capital across the globe. It is also why policymakers often frown on credit rating agencies, which do not seem to fully understand the complexity of their economic problems before acting negatively.

Part of the problem of sovereign rating assessments is the almost “one-size-fits-all” rating templates used by credit rating agencies. Adding to this is the subjective nature of the weights assigned to the factors being assessed in deriving the rating. While some differentiation is made when dealing with different countries, statistics are normally compared across peers in the same rating band.

Such a comparison fails, however, to capture a country’s specific characteristics, policies and political intricacies. Indeed, it is unfortunate that many who provide sovereign assessments do not spend sufficient time in the countries they review.

Nor Zahidi Alias is a former chief economist at Malaysian Rating Corp Bhd

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