A team of CGS-CIMB economists have predicted the ASEAN economic recovery to follow a “Nike swoosh”, with Malaysia likely to lead the pack for Southeast Asia. In short, they are saying that following a short and steep recession, the regional economy will slowly pick up amid lasting economic pressures and gradual easing of lockdown measures.
“Demand shocks from permanent business closures, unemployment, debt impairments and more cautious consumption habits could cast a longer shadow on the economic recovery relative to past recessions,” writes the team comprising Michelle Chia, Lim Yee Ping and Muhammad Zafri Zulkeffeli in a broker’s report yesterday.
The team does not expect global GDP to recover to pre-Covid-19 levels until 2022. Disinflationary measures are likely to persist over the next 18 months, with supply side restoration outpacing demand renewal alongside strong economic stimulus.
“Global GDP is poised to record the most severe quarterly contraction in 2Q20 since The Great Depression due to major disruptions across all economic sectors. The Markit Global Composite Output Index bottomed in Apr at a record low of 26.2, significantly lower than the GFC trough of 36.7,” the report continues.
Fiscal and monetary policy is therefore likely to remain expansionary until the negative output gap is rectified. G7 central banks expanded their balance sheets more quickly than during the Global Financial Crisis in 2008, which saw expansion by a cumulative US$6 trillion ($8.27 trillion) or 13.4% of GDP.
But such moves could expand the total fiscal deficit to 10.2% of global GDP vis-a-vis 6.3% in 2009. The resulting debt accumulation and rising debt service costs for households, businesses and the public sector, potentially affecting medium-term growth for the region.
The CGS-CIMB team therefore sees an uneven pace of recovery going forward. Economies that can control the Covid-19 pandemic quickly with minimal lockdown risk, high exposure to domestic demand and low exposure to tourism and international travel, as well as those that display policy flexibility are likely to see the quickest recovery from the downturn.
Economic recovery in ASEAN has been patchy so far, with large variance (around 30%) of mobility recovery to economically significant areas compared to the pre-Covid baseline suggests that the easing of voluntary and mandatory social distancing is asymmetrical even as infection numbers decrease. China will likely lead the recovery and return to near-trend by end-2021 following decisive measures to contain the virus, but a spike in cases and uncertainty about continued federal unemployment benefits in the US is cause for concern.
Aggressive fiscal and monetary stimulus in Malaysia and its diversified economic base is likely to see it lead the recovery in ASEAN. “Sentiment has improved sharply, with the Markit Manufacturing PMI for Malaysia rising from a record low of 31.3 in Apr to 51.0 in Jun, the strongest rebound among Asean countries,” report Chia and Lim. Despite Singapore’s greater fiscal pace supporting its medium-term recovery, Indonesia is likely to recover more quickly due to its greater reliance on domestic demand for growth.
Thailand is expected to recover slowest, however, due to its high exposure to tourism and slow stimulus response to the Covid-19 recession. Weak household financial buffers and structural headwinds could exacerbate cash flow difficulties going forward. The extension of the state of Emergency in Thailand and an exodus of technocratic ministers from cabinet hint that political leaders may currently be focused on consolidating power following elections in 2019, which Chia and Zulkeffeli feel could distract from policymaking.
Malaysia and Singapore have more room for monetary policy easing should the situation worsen further. Other regional countries lacking the financial wherewithal of Malaysia and Singapore are looking at unconventional methods of raising stimulus funds, with the Indonesian government in particular signing a deal with the central bank to share the interest burden of fiscal spending. The one-off nature of this deal will allay fears of a loss of central bank independence for now, though a future repeat could weaken investor confidence.
“Nonetheless, the risk of a sovereign credit rating downgrade remains on the table [for Indonesia], in our view, until the government rolls out remedial measures for narrow tax base and rising public debt service ratio to preserve fiscal space for productive spending when the 3% fiscal rule is reimposed in 2023,” warn Lim and Chia.
