Asia after the storm

The world has been battered by the coronavirus pandemic this year. Most economic activity was suspended as many of us spent our days confined to our homes.

The Asia Pacific region will not escape unscathed. Decades of globalisation ensures that we are all in this together, regardless of where one lives, and whether one likes it or not.

That said, despite the grim prognosis of protracted pain, there are three reasons why this region may be better placed to weather the storm:

Effective public health response

Asian markets have been among the most successful in tackling the public health crisis. Many were among the first jurisdictions to restrict the movement of people; to test populations on a meaningful scale; and to trace everyone who had come into contact with an infected person.

As of June 1, South Korea (pop. 52 million) had kept coronavirus deaths to 271. By contrast, the coronavirus death toll in Britain (pop. 66 million) was 38,489. Fatalities in Taiwan and Hong Kong were in single digits. China, despite initial missteps, was reopening for business. Vietnam, defying the odds, had reported no deaths1.

To be sure, inadequate testing elsewhere prevents public health authorities from responding effectively. Less wealthy Asian countries are especially vulnerable. Poor healthcare infrastructure and a weaker ability to bear the economic costs of a prolonged lockdown, cloud their outlook.

‘Asia’s handling of the public health crisis compares favourably with many other parts of the world’.

But, as a region, Asia’s handling of the public health crisis compares favourably with many other parts of the world. Policymakers got serious early on due to bitter experience with SARS and bird flu. Populations, in general, trusted their governments and cooperated with them. For example, there was less push-back over the use of contact tracing technologies because of privacy concerns.

We are still in the early stages of this pandemic. But Asia has demonstrated a level of competence and self-discipline that may yet mitigate the damage caused. It should be in relatively good shape once the economic recovery arrives.

Room for monetary, fiscal policy

Asian policymakers have followed a ‘lite’ version of the advanced economy playbook. The region’s central bankers have room to escalate their response because they don’t face the same constraints as other major economies (interest rates aren’t close to zero).

Central banks – such as those in South Korea, Indonesia and Thailand – have also initiated asset purchases. But this kind of bond-buying across the Asia Pacific region has been modest so far.

The size of these purchases will grow, even though regional central banks are at different stages of preparedness. These quantitative easing (QE) programmes, a major feature of the global financial crisis more than a decade ago, help inject liquidity into the financial system.

Funding and credit-easing policies (such as India’s Long-Term Repo Operations) are being stepped up. So far the size of these schemes represents a tiny fraction of gross domestic product (GDP), but this will increase. There is scope in Asia for further expansion of unconventional stimulus policies.

Asian countries tend to be much better financed and governed than during earlier crises. This places them in a better fiscal position to weather the current storm.

Public sector debt-to-GDP is generally more manageable, with the ratio ranging between 30%-55% for most Asian economies (except Japan, India and Singapore)2. This suggests that the public sector in Asia has room to borrow more to fund stimulus efforts.

Given the size of the fiscal expansion already announced, deficits are likely to widen. But this is from a low base, with most Asian economies (except China and India) running deficits that are no more than -3.5% of GDP (as of 2018)3.

The dynamic between private and public sector savings will matter. In particular, a reduction in private investment (i.e. a rise in savings) implies that space is opening up for more government borrowing, without impacting the current account.

More domestic consumption

Bigger developed economies in Asia are not as reliant on exports as they would have been, say, a decade ago, in the wake of the global financial crisis.

For some years now, policymakers have sought to re-shape these economies to rely more on domestic consumption, with a greater focus on non-manufacturing (i.e. service sector) productivity.

The growth of middle-income households has coincided with a slow, but steady rise in the share of private consumption of overall GDP. For economies in the East Asia and Pacific region, household spending now accounts for 49.1% of economic activity4.

Unsurprisingly, governments in the region have been placing a greater emphasis on income-led growth. Calls for higher wages in more developed economies and, more recently, cash hand-outs as part of relief measures, indicate the importance of consumption.

However, one side effect of these developments has been higher consumer debt, especially mortgage debt. While red hot property markets may have caused concerns, a virus-linked property slump would damage consumer sentiment.

What’s more, as long as the global economy remains shaky, even a large domestic market would feel the impact from weaker manufacturing and exports.

Looking ahead, a potential source of growth could lie in closing the productivity gap between Asian and western economies. Asian productivity has been in decline for years. Productivity per capita GDP fell to some 4.56% last year, after peaking at 9.97% in 20075.

Boosting productivity, especially in the service sector, will be key to growth. This would require opening up to greater competition, as well as spending more on education and retraining to equip workers with new skills.

1 National sources, June 2020
International Monetary Fund, Fiscal Monitor, May 2020
International Monetary Fund, Fiscal Monitor, May 2020
World Bank, World Development Indicators, May 2020
International Monetary Fund, World Economic Outlook, May 2020

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