Bonds in two Asian countries, India and the Philippines, are most vulnerable amid fears of further economic slowdowns due to the Omicron variant of COVID-19, a report said on Thursday.
Of the seven Asian countries, India and Philippines have the steepest bond yield curves. As a result, any additional fiscal stimulus by the government would come at a higher cost, Bloomberg reported.
It added that inflation would limit the scope of monetary easing by the government and lower vaccination rates would add to the stress on the two economies.
“In the event, Omicron turns out worse than the Delta strain, India and Philippines may see some deterioration of the fiscal and debt outlook due to weaker government revenues and the need for extended stimulus in 2022,” Duncan Tan, strategist at DBS Bank in Singapore, told Bloomberg.
His remark comes at a time when two Omicron cases have been reported. However, there is so far no known case of the new stain in Philippines.
Investors have been worried about the threat posed by the new variant, which was first detected in South Africa last month. The global market roiled under pressure as countries rushed to seal borders and impose travel bans to limit the spread of the new mutant. As health experts weigh the severity of Omicron, investors are treading cautiously and waiting for more information on the new variant.
The yield spread between two-year government bonds and 10-year bonds is the widest compared with the five-year average in India and Philippines. This is because India’s borrowing programme for the ongoing financial year is already nearing a record high. And, for Philippines, the budget deficit this year is already at an all-time high.
Meanwhile, the Reserve Bank of India ended its bond purchase programme in September, which may add to the pressure on Indian bonds. In the Philippines, on the other hand, rising yields have prompted the government to reject a few tenders at auctions in October.
Apart from the fiscal constraints in the two countries, higher inflation will also narrow the scope for monetary easing, according to the report.