Stability concerns lurk despite massive policy effort

Highlights from the CAA Weekly Table

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.
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