Asian Insights

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Stability concerns lurk despite massive policy effort

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There are five themes that are shaping the environment for Asian economies:

  • Tougher public health restrictions will deepen the economic downturn: Alarming statistics on new infections and overwhelmed healthcare systems have precipitated stringent restrictions to limit the spread of the virus. The resulting sudden halt to economic across the world is most damaging to trade-oriented East and Southeast Asian economies.
  • Radical policy support measures implemented globally to mitigate the economic impact: To alleviate the shock to economic activity, massive monetary and fiscal support has been put in place. These will provide succour to vulnerable segments of the population but will not avert a global recession.
  • But there are more signs of financial stresses: Despite these policy interventions, indicators of financial stress remain elevated. Emerging market economies will soon come under greater pressure as a result.
  • The Chinese economy could deliver an upside surprise: China’s leaders, confident that they have overcome the risks to public health, now seek a swift recovery in the economy. Expect a massive fiscal stimulus in coming days – one which will help produce a strong recovery in the second half.
  • Do not under-estimate the political downsides: Political leaders who have mishandled the coronavirus crisis are seeing their popularity eroded. In Indonesia’s case, this could have the broader effect of putting its game-changing labour market reforms at risk.
  • Stability concerns lurk despite massive policy effort: Asian governments have announced wide-ranging monetary and fiscal interventions. These
    will help cushion the worst effects of the crisis. China, South Korea and Singapore, with stronger state capacity and more policy space have been ahead of the curve, with other countries now trying to catch up after a slow initial response.
  • We continue to be concerned about potential financial stresses in the region: Malaysia, India and Indonesia are most at risk. Concerns of stability could easily precipitate capital flight that central banks are ill-equipped to staunch, given their paltry reserves. While the testing times permit a dollop of fiscal stimulus to arrest the downward spiral in economic conditions, a narrow tax base will also present fresh concerns for policymakers to shore up their finances once the current crisis abates.

Escalating financial risks: how will Asian economies fare? ; Singapore: Recession imminent; aggressive stimulus forthcoming

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Four themes emerge from recent developments…

  • More global dislocations portend contraction in Asia: Extreme restrictions on social mingling and travel will crush economic activity around the world for at least 1-2 months; China’s recovery could surprise positively but it will not offset the overall shock to global demand.
  • Growing signs of financial stress: The sharp fall in cashflows is likely to lead to a rise in defaults, the fear of which is already causing severe corrections in financial markets. High debt levels are amplifying the scale and severity of these aftershocks.
  • Policy responses are becoming formidable: The total stimulus being considered now amounts to about 5% of global GDP, but it is the composition of fiscal spending as well as the accompanying non-fiscal measures which are key. Importantly, the cumulative effect of policy support measures will only begin to drive a recovery in the second half of the year.
  • Look beyond the virus crisis: other stresses are building: Tensions in the oil market and geo-political stresses are building, which could amplify virus-related shocks.

leading us to revise our forecasts for Asian economies:

2020

Growth (%)

Inflation (%)

CA (% of GDP)

Currency (vs. USD)

Policy Rate (%)

China

2.5

3.0

0.8

6.95

2.80

Hong Kong

-0.7

1.5

2.5

7.80

India

5.2

3.8

-1.3

73.0

4.30

South Korea

0.6

0.7

3.6

1,150

0.50

Taiwan

1.6

0.6

11.0

29.7

1.00

Singapore

-0.4

0.4

16.0

1.40

Thailand

-0.5

0.3

5.2

32.5

0.50

Vietnam

5.5

2.6

1.7

23,100

4.50

Indonesia

4.6

2.9

-2.5

14,500

3.75

The Philippines

5.5

2.7

-1.5

51.0

2.75

Malaysia

2.5

1.3

3.0

4.3

2.00

Source: Centennial Asia Advisors

Escalating financial risks: how will Asian economies fare?

  • In the previous Weekly, we flagged three risks posed to Asia from the escalating financial contagion that have since materialised in full: the region’s currencies, equities and bonds have continued to take a drubbing, while a stratospheric rise in the USD has magnified fears of a dollar funding squeeze for the non-financial corporate sector.
  • Now, a toxic mix of sharply slowing growth from the impending collapse in global demand, tightening financial conditions and existing high leverage in some jurisdictions will amplify the economic damage that is to come, with negative implications for banking sector stability.

Singapore: Recession imminent; aggressive stimulus forthcoming

  • The precipitous decline in global activity makes it virtually certain that Singapore will enter a recession in 1H20. With broad-based economic weakness likely on top of downside risks to the inflation outlook and the probability of further slippage in the labour market, policy support will be aggressively ramped up to cushion the worst of the virus’ effects.