RaboResearch - Economic Research

Asia: Emerging Market Vulnerability Heatmap


  • Omicron (first discovered in South Africa) is spreading rapidly in developed economies, it will be a matter of time before it spreads to (a broad set of) developing economies
  • The population in developing economies are more vulnerable to new virus strains due to lower vaccination coverage, slower pace of vaccination and the nature of their vaccines
  • This study focuses on Asian countries: India, Indonesia, Malaysia, the Philippines and Thailand
  • Fiscal flexibility in developing economies has deteriorated as a result of dealing with successive waves of Covid-19 with large numbers of confirmed cases
  • India and Malaysia have the highest public debt, while India and the Philippines continue to run relatively high fiscal budget deficits
  • Consequently, interest costs are highest in India, followed by Indonesia and the Philippines, limiting their fiscal flexibility
  • Tighter monetary policy by major central banks presents dilemmas for central banks in developing economies
  • Developing economies can counter by also tightening monetary policy or continue the current loose monetary policy, but both options carry the risk of damaging the fragile economic recovery
  • India and Thailand have low foreign-currency denominated debt and ample foreign exchange (FX) reserves, giving their central banks relative flexibility in case of negative FX shocks
  • From a global perspective, Asian developing economies are relatively resistant compared to developing economies in other parts of the world, according to our emerging market vulnerability heatmap

The Wheel of (Mis)Fortune


Late November, scientists in South Africa alerted the international community to a new and highly transmissible Covid-19 strain. The WHO named this coronavirus variant ‘Omicron’. Since its discovery, Omicron has sparked fear globally due to its high degree of transmissibility. Omicron has beaten experts’ expectations on the spread of the virus in the US, the UK and Denmark. In a very short time, it has become the dominant virus strain in a number of countries. In some areas the number of cases is doubling every two to three days.

Although there is still uncertainty with regard to Omicron’s specific features, there are increasing signs that Omicron is much more transmissible, but less virulent. Nevertheless, even if it proves to be milder, it can still cause considerable pressure on healthcare systems as it spreads so much faster. The number of Covid cases has already reached record highs in some countries and it broke the global daily record in the US last week (see Figure 1). Currently, there is no evidence of a quick spread of Omicron in ASEAN countries, as the number of cases is still below previous peaks (see Figure 1). However, in India the number of cases has increased rapidly over the past week. Hence, it will probably be a matter of time before Omicron spreads in developing economies as well.

Figure 1: New Covid-19 cases
Figure 1: New Covid-19 casesSource: Macrobond, Our World in Data

However, on a more positive note, South Africa’s Gauteng province – the region where Omicron first emerged – is now seeing a decline in infections, while the number of deaths has only marginally increased in relation to the increase in the number of cases. Similarly, scientists in Cambridge have found that Omicron is less successful at infecting lung cells than previous variants, a finding that was confirmed by other research groups. On the other hand, the same study shows that the virus is better able to evade vaccine-induced antibodies, which would make current vaccines less effective against Omicron. This could be even more the case for countries using vaccines without mRNA technology.

Resistance to What’s Still to Come: Pi, Rho, or Sigma?

While we would like to stress that we are not virologists, amidst the current uncertainties, one thing is clear: Covid-19 has not yet been banished from our lives. The risk of the emergence of new variants remains as long as the virus is able to spread in one country or another. Whether and when, and how that happens is akin to spinning the wheel of fortune. From that perspective, it is relevant to take stock of the vulnerability of developing economies going forward. Therefore, this publication assesses the vulnerability of selected[1] Asian countries with regard to new external shocks such as new Covid-19 variants that may arise and against which current vaccines may or (more likely) may not be effective.

According to many experts and policymakers, vaccines are key in combating the virus. Vaccines help either by limiting its spread, or by lowering the odds of severe illness. If we compare vaccination rates between the selected countries, we observe that vaccination rates in Malaysia and Thailand are higher or equal to those in developed economies, while vaccination rates in Indonesia, the Philippines and India are much lower (see Figure 2). Moreover, many of the vaccinations used in the latter group of countries, like Sinovac, seem to be less effective against Omicron. This means that these countries are potentially facing a greater risk of new peaks in Covid-19 cases over the course of 2022.

The Vaccination Pace

Given the abovementioned uncertainties, it is important to consider the ability of countries to respond to new strains in the event that these require other vaccines or booster shots. The most important factor in this regard, was the availability of vaccines, which was unequal in the first phase. There were large differences in vaccine availability between developed and developing economies in 2021. The first shots in the US were available in December 2020, while developing economies had to wait many weeks – in some cases over three months – before the first shots became available: Indonesia (7), India (9), Malaysia (11), Philippines (16) and Thailand (15). Obviously, new vaccines (other than the booster) are not yet available. But assuming new vaccines do become available, how quickly can these be distributed in the selected countries?

Figure 2: Rate of full vaccination
Figure 2: Rate of full vaccinationSource: Macrobond, Our World in Data
Figure 3: Pace of vaccination
Figure 3: Pace of vaccinationSource: Macrobond, Our World in Data. *see footnote 2

Our analysis shows that the US was fastest in this regard, requiring only 11 weeks between the first shot and full vaccination for 10% of the population (see Figure 3). Germany, Malaysia, Thailand and the Philippines needed a similar amount of time, between 18-21 weeks. India and Indonesia needed more than 25 weeks to reach the 10% threshold. Furthermore, the pace of vaccinations[2] is highest in Malaysia and lowest in in India, Indonesia and the Philippines (see Figure 3). This is important because it is an indication of the ability of these countries to scale up vaccination programs domestically. Obviously, these differences can be explained by differences in vaccine availability, health care systems, and logistic challenges.

In summary, developing economies such as Malaysia and Thailand are more likely to respond quickly to new strains and to vaccinate a large proportion of the population at a relatively fast pace. On the other hand, Indonesia, India and the Philippines have proven to be slower and therefore at greater risk of new spikes in Covid-19 cases and lockdowns, especially in a scenario where current vaccines become ineffective.

Fiscal Policy – What’s Left in the Tank

In a scenario where governments are forced to impose renewed lockdowns in order to limit the spread of new or existing virus variants, a fiscal response may also be required. This in order to support the health care sector, keep businesses afloat and/or prevent households from falling into poverty. But what is actually left in the (fiscal) tank of governments in developing economies after they have already dealt with several waves of Covid-19?

When looking at public debt, we observe that debt levels have significantly increased over the past two years (see Figure 4). India has the highest total public debt as a percentage of GDP (83.9%), followed by Malaysia (66.8%). But the Philippines have the largest percentage-point increase since the start of the pandemic (as much as 20 percentage-points), followed by Thailand (17.5 percentage-points). Similarly, when considering the budget deficit, we notice that the Philippines have the highest budget deficit, followed by India, while Malaysia and Thailand face lower budget deficits (see Figure 5).

Figure 4: Public debt has increased
Figure 4: Public debt has increasedSource: IIF EM Global Debt Monitor
Figure 5: Large budget deficits continue to exist
Figure 5: Large budget deficits continue to existSource: IIF Fiscal accounts and public debt

Public debt and government budget deficits are only one side of the coin. Taken in isolation, this does not immediately constrain countries from additional fiscal spending or limit a government’s fiscal headroom. What’s important in this regard is the cost of debt and the serviceability of the debt, which is important to investors. Governments can continue to spend and increase their debt levels or budget deficits as long as investors are willing to finance the local government.

However, servicing debt becomes increasingly difficult when debt is piled up and investors demand higher returns on their investments (see Figure 6). Higher yields put pressure on governments’ budgets since higher interest rates increase the cost of new debt, which in turn, reduces debt sustainability. Currently, yields are highest in India and Indonesia, while yields in Thailand are (still) relatively low. But what does this mean for their fiscal leeway?

The interest rate costs as a percentage of government revenue are an indicator of debt sustainability, as they reflect the share of government revenue used for interest repayments (see Figure 7). India uses almost a third of its income to service its debt, Indonesia uses about 15% of its revenue. Thailand has the lowest debt costs, which means it has the greatest degree of flexibility with regard to additional fiscal spending. Summing up, from a debt perspective, India and the Philippines are most vulnerable to new external shocks – such as a new wave of Covid-19 – because their fiscal headroom to combat a new crisis is more limited.

Figure 6: Costs of debt differ
Figure 6: Costs of debt differSource: Macrobond
Figure 7: Interest costs are already high
Figure 7: Interest costs are already high Source: IMF Fiscal Monitor estimates


Monetary Policy – How Low Can You Go (Stay)

Covid-19 was not the only ‘wave’ to hit the economy globally. (Unconventional) monetary policy flooded the economy with additional liquidity. This was a response by central banks to counteract the negative impact of Covid-19 on the economy and interest rates were cut to historic lows (see Figure 8).

Figure 8: Interest rates are at all time low
Figure 8: Interest rates are at all time lowSource: Macrobond, Raboresearch
Figure 9: Currency performance vs. USD
Figure 9: Currency performance vs. USDSource: Macrobond, RaboResearch

Tighter Global Monetary Policy

Inflation is currently surging in many developed economies as a result of supply chain issues, high commodity prices and a rebounding of (global) demand. This leads to a more hawkish approach by some major central banks, which have begun tightening monetary policy in recent weeks. For example, the US Federal Reserve (also known as the Fed) has announced to speed up its ‘tapering’ of bond purchases, the Bank of England has raised interest rates, and the ECB has announced the end of the PEPP (pandemic emergency purchase program) – although asset purchases will continue through 2022. Why is this important?

Developing economies become less attractive to investors if interest rate differentials narrow. One of the downside risks is that this can trigger a decrease in capital flows towards developing economies, which in turn causes their currencies to depreciate. The reaction of local currencies vis-à-vis the USD[3] in response to Fed policy meetings is illustrative in this regard (see Figure 9): (1) In June 2021 the first hawkish signals regarding ‘tapering’ emerged, which resulted in a currency depreciation in developing economies. (2) A more cautious (dovish) outcome of the Jackson Hole Economic Policy Symposium at the end of August led to appreciation of local currencies. (3) The higher-than-expected US Consumer Price Index in November then led back to more hawkish expectations regarding the Fed’s monetary policy, resulting in depreciation of local currencies in developing economies.

Currency Risk Vulnerability

Tightening global monetary policy poses a dilemma for policymakers in developing economies. On the one hand, maintaining interest rates at current levels will lead to depreciation of the domestic currency in case other central banks continue to tighten. Depreciation of the local currency is disadvantageous for the domestic economy because it can result in imported inflation (which increases domestic inflation). On the other hand, there is the option of tightening monetary policy, i.e., increasing interest rates to maintain interest rate differentials, prevent depreciation of the local currency and prevent inflation from rising too quickly. However, raising interest rates too early might derail the fragile domestic economic recovery. So how flexible or independent are developing economies in setting their monetary policy without jeopardizing the economy or government? In other words, how vulnerable are the selected economies with regard to a depreciating currency?

One way to assess this is to look at the exposure and liabilities vis-à-vis foreign currencies, because debt and costs of debt are increasing when the local currency depreciates. From this perspective, Indonesia is most vulnerable. Almost 23% of their total debt is denominated in foreign currency (see Figure 10). This makes Indonesia relatively vulnerable to external shocks that negatively impact the rupiah and limits the flexibility of the central bank’s monetary policy. Malaysia, India and Thailand are relatively well-positioned in this regard, since their foreign currency denominated debt represents a relatively low percentage of their total public debt.

Figure 10: Indonesia relatively vulnerable to currency shocks
Figure 10: Indonesia relatively vulnerable to currency shocksSource: IIF Global Debt Monitor[4]
Figure 11: Import cover is decreasing on back of recovering imports
Figure 11: Import cover is decreasing on back of recovering importsSource: IIF Global Debt Monitor

Furthermore, central banks hold FX reserves to absorb external shocks and fortify their autonomy with regard to the value of the domestic currency. Therefore, FX reserves are another important measure to gauge the vulnerability of central banks to external shocks that negatively impact the value of the local currency. A great proxy in this regard is the import cover (see Figure 11). Correcting total FX reserves for a country’s total import, provides us with a measure that enables us to compare countries, as it corrects for the capital needed to cover a country’s imports. The import cover has deteriorated in all countries over the past year, even though total FX reserves increased in all countries. How come? One explanation is that imports increased significantly in 2021 compared to 2020, when imports collapsed due to the outbreak of the Covid-19 pandemic. Nevertheless, FX reserves are relatively strong, which limits vulnerability to currency shocks. India and Thailand lead the way, having enough reserves to cover more than a year of imports. While Malaysia has the least FX reserves, enough for 5.5 months of imports.

Global Perspective

Table 1: Vulnerability ranking based on EM Heatmap
Table 1: Vulnerability ranking based on EM HeatmapSource: RaboResearch

Finally, it is important to put the performance of the selected Asian economies in a global perspective. Therefore, we use our emerging market vulnerability heatmap (see Appendix 1). Our heatmap[5] uses many more economic indicators than are highlighted in this study and provides a solid global overview of the relative vulnerability of the selected Asian economies and other developing economies (see Table 1). The analysis shows that Asian countries are performing relatively well, although the Philippines and Malaysia are in the top half of the vulnerability ranking. For Malaysia, this might come as a surprise, as the country scores relatively well on a number of indicators we previously highlighted. However, household and corporate debt are relatively high in Malaysia, which weighs on their overall score. Another feature is that countries in South America are relatively vulnerable. We find South American countries in the top half of the vulnerability ranking. Furthermore, the overall scores of the selected Asian economies have deteriorated compared to six months ago. Obviously, these are very challenging times and all countries experienced additional surges in Covid-19 cases. As a result, countries have seen their scores deteriorate compared to pre-Covid levels (see Table 1). Nonetheless, it is important to continue to monitor vulnerability towards external shocks. Especially in these unprecedented and uncertain times.

Table 2: Resistance towards (unknown) negative shocks
Table 2: Resistance towards (unknown) negative shocksSource: RaboResearch


After almost two years of Covid-19 distress, the fiscal position of the selected Asian developing economies has deteriorated. Further divergence between them and the developed economies lurks. Developed economies have well-vaccinated populations clearing the way for stronger economic expansion. Tighter monetary policy might even be required to curb inflation in developed economies, raising dilemmas for central banks in developing economies to either counter by also introducing tighter monetary policy or continue the current loose monetary policy. In either case, developing economies would risk damaging their fragile economic recovery.

Nonetheless, from a global perspective, Asian developing economies are relatively resistant to new shocks, even if vulnerability varies across countries (see Appendix 1). Zooming in on the selected Asian economies and chosen vulnerability indicators, India, Indonesia and the Philippines are relatively vulnerable to new shocks compared to Malaysia and Thailand (see Table 2). Still, all of the selected economies have seen their vulnerability increase since the start of the pandemic. Malaysia sees its score deteriorating the most, followed by the Philippines, Indonesia and Thailand.

Appendix 1: EM vulnerability Heatmap

Table 3: Full EM vulnerability Heatmap
Table 3: Full EM vulnerability HeatmapSource: RaboResearch


[1] India, Indonesia, Malaysia, the Philippines, Thailand

[2] The vaccination pace is calculated as follows: average weekly percentage-point increase in fully vaccinated people between 10% and 50% to account for startup time and vaccination hesitancy among domestic population.

[3] The index is calculated as the sum of index local currencies (IDR, INR, MYR, PHP, THB) vs. the USD, where each currency is weighted equally in the index.

[4] No data available in IIF database on foreign currency denominated debt for the Philippines.

[5] Please note the heatmap does not take vaccination status or vaccination pace into account.


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