Economic contractions overshadow Asean-6 recovery

lingering. After slow disbursements until late summer, half of the stimulus package remain to be disbursed.

Weakening sentiment is reflected by broad protests over the new jobs-creation law, which President Joko Widodo has promoted. Critics say it is scrapping labor rights, environmental protections and indigenous community rights.

In the Philippines, the 2020 contraction will be severe (-8.3 percent), due to Covid-19 surge in the summer, new quarantines and the consequent fall of domestic demand. In part, the contraction has been offset by the central bank’s aggressive policy easing, net exports (thanks to import stagnation) and rising remittances.

Nonetheless, President Rodrigo Duterte has managed to keep his support intact and his ratings have actually increased in the course of the pandemic. However, the hoped-for fast recovery is predicated on bending the epidemic curve, reignition of the government’s huge infrastructure initiatives and, in particular, job creation.

After major contractions, bumpy road to recovery

In Thailand, economic conditions have further deteriorated since June. As a result, the contraction (-7.1 percent) is expected to be worse than initially anticipated. Weak performance in the auto sector is dragging overall export performance, while tourism will continue to undermine the overall economic outlook. Though needed in the short-term, fiscal easing is pushing deficit and debt levels higher.

Dire economic prospects translate to rising political unrest, which led the government to declare a state of emergency after tens of thousands of protesters gathered in Bangkok.

The demonstrators are pushing for a new constitution, removal of Prime Minister Prayuth Chan-ocha and reform of the monarchy.

In 2020, Malaysia and Singapore each are expected to suffer a deeper-than-expected contraction (-6 percent). In Singapore, border closures have taken a heavy toll on tourism, although the manufacturing sector is recovering with rising industrial output.

To a degree, Singapore has benefited from Hong Kong’s unrest, which has sparked a new influx of investment, corporates and business. But Hong Kong’s volatility has also caused some unease in the city-state, which has been ruled by the People’s Action Party (PAP) since 1959.

Singapore’s recovery has been predicated on strong fiscal stimuli and thus substantial leverage. As a consequence, government debt has surged in the past two years: from 109 percent in 2018 to more than 142 percent of the gross domestic product (GDP) last June.

In Malaysia, recovery has been strengthened, but full recovery won’t return until in 2021. While the recent surge in infections is manageable, recovery could prove bumpier than anticipated. Before summer, unemployment surged (5.4 percent), but the good news is that exports and industrial output began to recover in July.

In Malaysia, too, recovery rests on significant fiscal easing (20 percent of GDP), while increasing leverage has caused government debt (59 percent of GDP) to exceed the limit.

Among the Asean-6 economies, only Vietnam is expected to avoid a contraction in 2020, in part thanks to US trade and technology war against China. Improved GDP growth has been fueled by recovery in exports, which has benefited from offshored manufacturing capacity from China. Yet, foreign investment flows have fallen.

Despite solid trade performance, darker clouds loom in the horizon as the Trump administration is now “investigating” Vietnam’s trade practices and alleged currency manipulation.

Four caveats

While many analysts are projecting Southeast Asia’s fast recovery in 2021, those predictions are in part optical. Due to sub-optimal growth in 2020, next year’s growth outlook will seem better than it is in substance.

Second, new Covid-19 infection surges would cause further deterioration in economic expectations.

Third, since most countries have had to resort to significant fiscal stimuli, they will also have to cope with higher deficit and debt burden in the future.

Finally, most analyst projections downplay the cold fact that if the United States tariff wars against China ( and many other major economies) will continue and further expand in Southeast Asia, the consequent trade friction and aggressive geopolitics have potential to further impair Asean-6 forecasts.

ThecommentaryisbasedonDr Steinbock’sbriefingonOct.16,2020.