COVID-19: Pessimism excessive but things will get worse before getting better; Malaysia’s messy political re-alignment raises risks to stability

Highlights from the CAA Weekly Table

What has changed?

1. Key theme in Asian economies is policy: 

• Across the region, policy makers are stepping up efforts to counter the downside economic risks created by the coronavirus crisis. Countries with more policy space are likely to do well.
• Indonesia is implementing a vigorous set of fiscal measures and is likely to succeed in maintaining reasonable growth. With inflation still low and economic risks rising, Singapore will add monetary easing to the fiscal stimulus it has already promised. The Philippines will bolster its economy through monetary easing, a larger fiscal deficit and structural reforms.
• In India, the economy seems to be stabilising, but at a still-languid pace. However, its policy space is limited by high inflation and a weakening fiscal position. Thailand needs a fiscal boost but implementing its ambitious infrastructure programme is still a challenge.

2. Political risks: Communal clashes in India reflect a structural weakness in India

• Violent clashes between Hindus and Muslims in the capital city were the product of a long period of incitement of Hindu nationalist sentiment by politicians affiliated to the ruling party. Tensions continue but with the National Security Advisor now put in charge, there is a better chance of an end to the violence.

COVID-19: pessimism is probably excessive but things will get worse before they get better

• The COVID-19 crisis is turning out to be worse than we expected in three ways. First, its geographic spread and the response in terms of restrictions affecting economic activity is worse. Second, the latest data show that the impact of a slower Chinese economy is already hurting global demand. Third, the policy responses are not yet sufficient to provide good support for global demand.
• We are therefore downgrading our expectations for regional economic growth further – but we do not believe a recession is likely in any of the economies we follow. The economic impact will depend on each country’s (a) reliance on global demand; (b) exports to China; (c) vulnerability to supply chain disruptions; (d) reliance on tourism as a driver of growth; and (e) the degree of policy space to act as a shock absorber. East and Southeast Asia are likely to under-perform.

Malaysia’s messy political re-alignment raises risks to stability

The political re-alignment we had warned about has erupted in a messy manner, exposing fundamental flashpoints in Malaysia’s political system which bode ill for stability.

• Instability: The new coalition has a razor-thin majority. Even if bolstered by further defections, it will be an unstable coalition. A new election is likely which will create more uncertainty.
• Communal relations: The country now has the weakest representation of Chinese in government ever, marginalising a community that is still more than 20% of the population and which has a strong role in the economy.
• Necessary reforms are now less likely: The key to stability anywhere is robust institutions. Malaysia needs to revive key institutions but this now looks less promising.
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