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How well-positioned are Asian economies to absorb this shock? ; How will the oil price collapse impact Asian economies? ; The Philippines: Duterte’s tirades against oligarchs will spook investors
Highlights from the CAA Weekly Table
What has changed?
3 big changes: oil price collapse; virus hits global economy more severely; rising political risks.
- Asian economies face these risks with different levels of resilience: The Chinese economy re-activates but stressed SMEs make for a slow return to normalcy. The trade-reliant Singapore economy is more vulnerable but has sufficient policy space to counteract the worst of the crisis. More stimulus measures have been announced in Thailand, but their effectiveness is blunted given sapped confidence and reduced policy capacity. Both monetary and fiscal tools were deployed in Indonesia to contain the fallout from the Covid-19 virus, but their efficacy remains questionable. The Philippine economy is relatively resilient but growth will nevertheless be tested as electronic exports to China take a hit.
- Asian political risks: Taiwan risks an even harsher pushback by China as even the once pro-China Kuomintang opposition party adopts a position on reunification that will anger Beijing. Delays to the formation of the new cabinet in Malaysia point to intense tussling for ministerial portfolios; the new coalition’s shaky start raises risk of greater instability.
How well-positioned are Asian economies to absorb these multiple shocks?
- Key components of demand have weakened across the region. External demand has flagged everywhere; consumption is depressed and weakening – worsened by an outsized slump in tourist arrivals; but investment is a mixed bag with countries such as Taiwan & Singapore helped by strong inward investment.
- On the upside, internal and external stability conditions remain benign, which reduces the chances that the external shocks from the global economy might be amplified – while also creating policy space for countercyclical stimulus.
- Policy response, especially how quickly fiscal spending can be disbursed will be key to the near-term growth outlook, but this continues to be a challenge for Thailand and Indonesia.
How will the oil price collapse impact Asian economies?
- The Saudi-Russian standoff will keep prices low for several months – both are determined to diminish the US shale industry while Russia is bolstered by huge fiscal savings which will enable it to face down the Saudis. Oil prices are likely to stay on an extended bearish run.
- As a net oil importing region, the implications for Asia are mostly positive; the falling cost of crude can be thought of as an ‘automatic stabiliser’ amid the current step-down in growth, helping to support growth whilst keeping a lid on inflation and buttressing the region’s external and fiscal accounts.
The Philippines: Duterte’s tirades against oligarchs will spook investors
- The President has decided to pivot away from his War on Drugs to burnishing his credentials as a “Man of the People” leader with tirades against “oligarchs”, the landed families which have long dominated the country.
- While the President’s rhetoric has won him favour among the electorate, due in large part to the highly unequal Philippine economy and society, the attacks will also dampen the investment and business climate, at a delicate time when the economy is in dire need of foreign funds to finance its flagship infrastructure drive.
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.