Downgrade for developing nations in EAP
KUALA LUMPUR: Following the rapid spread of Covid-19 and the heightened financial volatility, growth outlook for developing countries in the East Asia and the Pacific (EAP) region, including Malaysia, has been sharply downgraded as they face global financial shock and recession.
According to the World Bank, growth in the developing EAP region is expected to slow to 2.1% in the baseline and to a negative 0.5% in the lower-case scenario in 2020 from an estimated 5.8% in 2019.
“In a rapidly changing environment, making precise growth projections is unusually difficult. Therefore, the report presents both a baseline and a lower-case scenario,” it said in a World Bank Report on East Asia and Pacific in The Time of Covid-19.
Meanwhile, growth in China is expected to decline to 2.3% in the baseline and 0.1% in the lower-case scenario in 2020, from 6.1% in 2019.
In February 2019 alone, China’s purchasing managers’ index fell below the 50-point mark, which was sharper and wider than during the great recession, to 36 in manufacturing and 30 in non-manufacturing.
Moreover, its industrial production also registered negative growth for the first time in more than 30 years.
Looking ahead, World Bank said it remained to be seen whether China could switch on economic activity abruptly as many large industrial enterprises have resumed production although small and medium enterprises (SMES) are still struggling.
On the other hand, it noted that the outlook for the Pacific island countries for this year is subjected to substantial risks due to their economies’ reliance on grants and tourism.
“The worsening of the Covid-19 pandemic and prolonged travel restrictions would have negative impacts on the tourism industry,” it said.
Overall, World Bank pointed out that the containment of the Covid-19 pandemic would allow for a sustained recovery in the EAP region although risks to the outlook from financial market stress would still remain high.
Given that all countries in the region dowgraded their growth forecasts, commodity shocks in Malaysia and Mongolia as well as droughts in Thailand also weighed on the outlook.
In the meantime, World Bank said the financial systems across the EAP region remained vulnerable to external shocks, especially in countries with high private-sector debt including Malaysia.
“The rate of increase in China, Indonesia, Malaysia, the Philippines and Thailand (EAP5) debt has been much faster than the rate of increase for the rest of the world, so that EAP-5 share of total global debt increased from 3.4% in 2005 to 18% in 2019,” it added.
Apart from the increased financial volatility, World Bank reported that Covid-19 shock would also adversely impact poverty reduction across the EAP region.
“The report estimates that under the baseline growth scenario, 24 million fewer people will escape poverty across the region in 2020 than would have in the absence of the pandemic, using a poverty line of US$5.50 per day,” it said.
Should the economic situation worsen further and the lower-case scenario prevails, the report noted that poverty is expected to increase by around 11 million people in the region.
“Prior projections estimated that 35 million people would escape poverty in the region in 2020, including over 25 million in China alone,” it said.
Moreover, World Bank vice-president for East Asia and the Pacific, Victoria Kwakwa, said that countries would have to act fast to mitigate the economic shock of Covid-19, given the strengths the region could tap.
Among the key actions recommended by the World Bank report to EAP countries are urgent investments in national healthcare capacity and longer-term preparedness.
“In addition, early investments in health can reduce the need to take costly preventive measures when epidemics strike.
“For example, countries like Singapore and South Korea seem to have benefited from high levels of testing, tracking and quarantines,” it said.
The World Bank report also proposed countries to target fiscal measures such as subsidies for sick pay and healthcare, which would help with the containment of Covid-19, as well as ascertain that temporary deprivation does not translate into long-term losses of human capital.