Covid-19: How much will scarring hurt the regional economies?

Highlights from the CAA Weekly Table:

Asian political risks: No good news

  • The collapse of the Afghan government hurts the region as a whole. American credibility and its security guarantees are under a cloud, potentially emboldening its rivals to undertake provocations. India is also a big loser. China, however, could emerge in a much better position – as both its major rivals, the US and India are on the back foot.
  • Malaysia’s political crisis deepened with Prime Minister Muhyiddin’s resignation. He will continue as caretaker prime minister while the fragmented political groups struggle to agree on a new prime minister and ruling coalition.
  • Two worrying trends emerge in Thailand: As protests spread, violence has increased. Moreover, without coherent leadership among the protestors, the likelihood grows that some disaffected groups might provoke the authorities into a harsher crackdown.

Asian economic prospects: 

The resurgence in COVID-19 infections is hurting growth across the region but some countries are likely to rebound more strongly than others as the year progresses.

  • China’s economy slowed across the board. But with activity likely to pick up on a rebound in investment, it is unlikely that policy makers will offer much stimulus.
  • Taiwan and Singapore’s robust performance can be sustained. As vaccination rates improve, Malaysia should put its malaise behind it, especially as its export sector is doing well.
  • India’s economy is finding its footing but Indonesia and the Philippines are still hurting.

Covid-19: watch four areas of scarring that will hurt the regional economies

  • The crisis will leave public debt levels much higher, a damaged credit culture, deficiencies in the labour market and capital stock eroded to some extent.
  • Taiwan, Korea, Vietnam, Thailand, China and Singapore come out looking stronger than the rest of the pack (Table 1). These countries are marked by relatively strong state capacity.
  • Indonesia, India, the Philippines and Malaysia, however, are in a weaker position.

Table 1: Z-scores for metrics on economic scarring in East Asia

NPL ratio (%)

Debt ratio (%)

Labour scarring (% deviation)

Capital scarring (% deviation)

Z-scores, the higher the better

Taiwan

0.2

33.8

-3.2

9.4

3.3

Korea

0.5

43.8

-3.8

4.1

2.0

Vietnam

2.1

55.3

0.6

4.1

1.6

Singapore

2.3

-12.3

-1.7

0.8

Thailand

3.1

52.1

-0.2

1.8

0.8

Indonesia

3.3

39.4

-2.2

-2.2

0.5

China

1.9

73.7

-5.1

-0.9

India

7.5

77.6

2.8

8.7

-1.2

Philippines

4.5

57.0

-5.8

-18.3

-3.4

Malaysia

1.6

62.2

-12.4

-16.9

-3.4

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16-Aug-2021