S&P Global Ratings projects that Asia-Pacific central government borrowings will remain high by historical standards in 2021, after a pandemic-driven surge in 2020. The sharply higher borrowing and the associated steep increase in government indebtedness was a reason behind the number of negative rating actions on some sovereigns in the region.

Long-term commercial borrowing is likely to be US$4.1 trillion this year, after a reaching a record US$4.6 trillion in 2020. Even though it is a reduction from last year, sovereign commercial debt will still be well above the sub-US$3 trillion levels in the few years leading up to 2019. Reduced issuances out of China and Japan are expected to account for the bulk of the decline. Although the fighting against COVID-19 continues in 2021, its burden on government finances is likely to be lower. For one, vaccines being rolled out in many countries should allow governments to rein in the disease and lower the infection rates globally sometime this year. In addition, having had about a year of experience dealing with the pandemic, most governments are better poised to limit the brunt of containment measures on their finances.

We estimate that 70% (or US$2.9 trillion) of the sovereigns' gross long-term commercial borrowings will be used to refinance maturing debt. Net long-term commercial borrowings should amount to about US$1.2 trillion this year (see tables 1-3 and chart 1 for more details). This is a little over half of the amount in 2020, but well above the US$500 billion-US$833 billion annually in 2016-2019. The projected issuance this year will bring the Asia-Pacific sovereign commercial debt stock to an equivalent of US$22 trillion by the end of 2021, up by about US$1.4 trillion from 2020. If we include bilateral and multilateral debt, the total stock in 2021 will reach US$22.4 trillion, about US$1.4 trillion above that in 2020. The share of noncommercial official debt (bilateral and multilateral) in total long-term sovereign debt will likely remain almost 2%--little changed from the past two years.

Almost all Asia-Pacific central government commercial debts are owed by investment-grade sovereigns. Investment-grade sovereigns owe most of central government commercial debts, because these are the largest economies in the region. The largest speculative-grade sovereign in the region--Pakistan--accounted for only less than 1% of total Asia-Pacific central government commercial debt. Bangladesh, the next largest, owed less than half of that. The share of debt in the 'BB' category or below is set to account for less than 2% of total commercial debt in 2021. At the end of this year, we project the share of commercial sovereign debt rated 'AAA' at 5.5% of total commercial debt, mainly due to a sharp increase in Australian issuances (see chart 2).

The stock of Australian government securities increased by nearly 45% in 2020 as the budget deficit widened with the impact of COVID-19. A sizable proportion of the new debt was issued in short-term Treasury notes. However, the government began to replace them with longer-term Treasury bonds from September 2020 onward.

Table 1

Japan's debt-rollover ratio (including short-term debt)--already the highest among rated Asia-Pacific sovereigns for several years--is likely to rise sharply to more than 80% of GDP in 2021, from about 60% in 2020 (see chart 3). This increase partly reflects the Japanese government's heavy reliance on treasury bill issuances to meet its funding needs as the budget deficit soared in 2020. The increase in Treasury bill issuances lowered the weighted average maturity of Japanese government bond issuances to six years and eight months in 2020, from nine years in 2019. It also means that the government will need to refinance a larger amount of short-term debt this year compared to the past.

Despite the increase in Treasury bill supply, the yields on these instruments remained negative. Apart from the Bank of Japan, foreign buying also helped to keep up the prices of these short-term papers. Foreign holdings of Japanese Treasury bills accounted for more than 46% of the total at the end of September 2020. Although holding these bills earn negative returns, some foreign investors have been able to turn a profit by using them to engage in dollar-yen basis swap trades. This is one reason for the popularity of these short-term papers with foreigners.

Given the size of Japan's outstanding debt, its government debt issuance dominates the statistics for the region. We estimate that Japan will account for more than 59% of total outstanding commercial debt issued by central governments in Asia-Pacific at the end of 2021. We also expect the Japanese government to make up almost 61% of fresh long-term commercial issuances by central governments in Asia-Pacific during 2021. Despite the large increase in the size of outstanding Japanese government debt over the years, its interest payments have been rather stable. In fiscal 2019, central government interest payments amounted to ¥7.8 trillion. This was little changed from that in fiscal 2011 and reflected the decline in the average interest rate on government borrowing to 0.87% from 1.24% over this period.

Japanese government finances, however, face significant interest rate risks as a result of the higher debt level. Recognizing the refinancing risks associated with its large debt stock, the Japanese government had been gradually extending the maturity of its outstanding debt until 2020. Although this was interrupted by the COVID-19 outbreak, it intends to increase the weighted average maturity of Japan government bonds this year. In its issuance plan, Japan aims to sell ¥700 billion more Treasury bills than what is needed to refinance maturing bills this year. Consequently, it will increase longer-term bonds issuance by close to ¥8.5 trillion yen to finance its fiscal 2021 deficit.

We project that China, the next largest central government borrower in Asia-Pacific, will account for about 17% of total commercial long-term borrowing this year. With COVID-19 largely under control within its borders, the Chinese economy had staged a strong recovery since the second quarter of 2020. Consequently, we believe the Chinese government is unlikely to continue its pandemic-related special Treasury debt issuance in 2021. Those debt issuances amounted to Chinese renminbi (RMB) 1 trillion in 2020. Although central government debt issuance is likely to decline markedly, the reduction in provincial government issuances may be smaller to allow local governments to continue to cushion potential economic weaknesses if COVID infection rates rebound.

Foreign holdings of Chinese government bonds have likely increased significantly in the past year. Nonresident holdings of all Chinese bonds traded on the country's interbank market rose by nearly 54% in 2020 to reach RMB2.9 trillion (US$445 billion). Central government bonds are likely to make up a large portion of these holdings as they account for about a quarter of all outstanding bonds and are the most actively traded ones. One reason for the increased foreign interest is the Chinese government bonds' inclusion or expected inclusion in key financial indices that international investors benchmark their investment performances against. Another is the series of changes that the Chinese government has made to allow more foreign participation in its domestic financial markets. The fact that Chinese policy interest rates have been relatively stable while other major central banks have eased monetary policy significantly has also made Chinese government bonds more attractive.

A number of smaller issuers in Southeast Asia are also projected to borrow significantly more this year than in the years before 2020. In Indonesia and Malaysia, where foreign holdings of local currency government debt are significant, the increased supply was met with heightened risk aversion among international investors in March and April 2020. Nevertheless, increased purchases by domestic financial institutions--especially banks-–helped to reverse the rise in government bond yields that accompanied the capital outflows from these countries as COVID-19 spread across the world. From the middle of 2020, international funds also began to return to these markets.

A similar increase in government bond holdings by Indian banks also helped push yields lower despite the large budget shortfall in 2020. In the face of a sharp economic contraction in the middle of the year, banks cut back on lending and purchased government bonds well above levels required by regulations. The economic recovery in recent months, however, has been accompanied by a slight increase in the 10-year government bond yield. If the upward trend continues, it will be a challenge for the government to fund its budget deficit in the coming fiscal year without paying much more in interest cost than it currently expects.

Methodological Note

The debt-rollover ratios for infrequent issuers, such as the Cook Islands, with small but lumpy debt obligations, can be very low if they have little or no debt maturing in a given year, or if those issuers do not have much short-term debt. The rollover ratios of sovereigns that have a higher proportion of official debt tend to be lower, because official debt typically has longer maturities than commercial debt.

These projections account only for the 21 Asia-Pacific sovereigns rated by S&P Global Ratings (see ratings list in table 5). Our estimates focus on debt that is issued by a central government (or a government that we rate using our sovereign rating methodology) in its own name, and in most cases exclude local government and social security debt as well as debt issued by other public bodies and government-guaranteed obligations. In terms of commercial debt instruments, our estimates for long-term borrowing include bonds with maturities of more than one year issued either on publicly listed markets or sold as private placements, as well as commercial bank loans.

In addition to commercial debt, some of the estimates we use in this study include official bilateral and multilateral debt. We do not include government debt issued by central banks for monetary policy purposes. All reported forecast figures are our own estimates, and do not necessarily reflect the issuers' projections. Our estimates are based on our expectations regarding central government deficits, our assessment of governments' potential extra-budgetary funding needs, and our estimates of debt maturities. Estimates that we express in dollars are subject to exchange rate variations.

Chart 1

Chart 2

Chart 3

Table 2

Table 3

Table 4

Table 5

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