How will the Wuhan virus affect Asian economic growth? ; Philippines: Firing on all cylinders; 2020 will be critical for tax reforms

Highlights from the CAA Weekly Table

What has changed?

• Asian economies: There are unmistakeable signs that the global tech cycle – so crucial to Asian growth – is turning around. Korea will benefit from robust fiscal support and firmer memory chip prices but any upside will be constrained by its vulnerable SME sector. Taiwan’s economy is on a tear; we think that this outperformance can be sustained. In Singapore, price pressures are likely to stay muted despite a gradual recovery in demand so monetary policy will remain unchanged come April. Bank Negara Malaysia pre-emptively front-loaded a 25bps rate cut so as to cushion the hitherto resilient economy against unfavourable global conditions. However, Bank Indonesia kept policy rates unchanged, though rate cuts loom in 1H20 as the economy underperforms. Prospects for the Thai economy are turning bleak as budgetary spending is further delayed.

How will the Wuhan virus affect Asian economic growth?

• The Wuhan flu epidemic is creating uncertainty globally but the main damage is likely to be confined to within China. Aggressive containment measures enacted by the Chinese authorities will exert a drag on growth in 1Q20.
• The negative spillovers to the other Asian economies, by way of financial market corrections, plummeting tourist flows, a weaker Chinese Yuan and faltering global business confidence, will prompt policymakers to step up to cushion the blow on growth.
• The crisis does raise serious questions on the state of governance within China, even as the direct impact on President Xi Jinping’s or the Communist Party’s standing remains negligible for the time being.

Philippines: Firing on all cylinders; 2020 will be critical for tax reforms

• The economic rebound is in full swing (4Q19: +6.6%), even though the quality of growth remains lacklustre, evinced by the sluggish momentum in private investments.
• Domestic demand remains robust and will continue to undergird the expansion moving forward. Remittances have been resilient, in spite of headwinds to global growth, while credit growth may have turned a corner after declining steadily in the face of elevated lending rates. Infrastructure spending will also lend support to the economy as well.
• Unanswered questions on Duterte’s health have buoyed his gravity-defying approval ratings in light of his enforced and prolonged absence from the public eye, despite the administration’s pro-China pivot and the controversial war on drugs.
• The year ahead will be critical for the tax reforms, ahead of the next presidential elections to be held in mid-2022. Quibbling over the second tax package (“CITIRA”) is likely to come to a head amid a tug-of-war over the rationalisation of tax incentives.
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