South and South-East Asia: Covid-19 strikes back and could mitigate this year’s economic performances

Event

In South Asia and South-East Asia, many countries are being hit by their most intense Covid-19 waves since the pandemic outbreak. India is the Asian epicentre with more than 300,000 cases and 3,000 deaths a day. The whole country is hit by a Covid-19 tsunami. Based on alarming reports in several states and on extreme shortages of medical equipment (leading to emergency international aid), those official figures are probably highly underestimated. Several states including Maharashtra and capital Delhi have imposed strict local lockdowns. Local containment measures have also been re-introduced in many countries (and many capitals) in South and South-East Asia. Besides pronounced spikes in infections in the Philippines and Indonesia (and to a lower extent in Malaysia and Pakistan), surges in cases are more modest in other countries but nevertheless exceed the peaks of last year and have even appeared in countries such as Laos and Cambodia where Covid-19 cases were almost absent in 2020.   

Impact

Although it recorded its first recession (-1%) in 60 years, emerging Asia’s economy was by far the world’s most resilient in 2020. This was due to a largely contained Covid-19 pandemic. But Covid-19 is also very resistant as mutant variants show and fighting it requires permanent caution. This is a bitter lesson for the Indian government. Indeed, only two months after PM Modi claimed victory on the infectious disease in last February, India has become the epicentre of the world’s most severe Covid-19 wave as daily infection and death rates report every day. To a much lower extent than in India, South Asian neighbouring countries, such as Bangladesh and Pakistan, also experience a marked surge in Covid-19 cases, which could rapidly increase in the coming weeks. This worrying evolution is also currently faced by many countries in South-East Asia – the Philippines and Indonesia being the most hit. As the virus was largely under control last year in those sub-regions, the intensity of the current second or third wave is probably explained by the various and more contagious virus variants and the potential fatigue towards containment rules (e.g. a recently crowded religious festival in India). The emergence of new variants has led countries to impose again local lockdowns at varying degrees. Moreover, this might motivate national authorities to accelerate the too slow vaccination plans. Except in Bhutan, in the Maldives and in Singapore, the average inoculation rate (of one dose) is indeed very low and lagging behind in Asia (below 4%). Explanations lie notably in supply issues and possibly in the past successful experience in controlling the virus. On a slightly more positive note, in mid-April, the inoculation rate reached 8% in India and 15% in China and could greatly increase in the months to come. Behind those two giant countries, Cambodia (7.7%) and Indonesia (4.3%) are showing the best vaccination progress. However, at the current pace and even considering rising supplies of Chinese and Russian vaccines, vaccinating the majority of the population could be a very long process and last until 2023 for many countries (e.g. Indonesia, Pakistan). As for Myanmar, vaccination is an extra concern amid a deep political and economic crisis. While data haven’t been reported since the February state coup, it is very likely that the chaotic situation has affected the testing and vaccination campaign.

These sharpest Covid-19 waves are occurring at a time of ongoing sustained recovery in the region. In emerging Asia, the 2021 real GDP growth outlook is strong (+8.5%) as economies are expected to continue on their recovery towards normalisation and pre-pandemic levels. Manufacturing exports (boosted by global and Chinese demands) and public spending will remain the main growth engines. The Covid-19 surge is nevertheless a risk to the economic outlook in South and South-East Asia particularly if containment measures are in place for a prolonged period and vaccination pace does not pick up significantly. In addition, disruption in global supply chains – especially the shortage of semiconductors – is likely to linger over the year whereas the tourism sector will continue to suffer as travel restrictions could be maintained for an extended period. The endless tourism crisis implies that economies more reliant on the sector such as the Maldives, Sri Lanka, Thailand and Malaysia could see a slower recovery. The same obviously applies to India’s overall economic activity. For other countries, the impact could be more limited. At this stage, good fundamentals in the region – with country disparities though – resilient remittances and foreign trade boost are likely to support the ongoing recovery and barely affect country risks. Looking ahead, in this uncertain economic and health context, and depending on the Covid-19 and vaccination evolution, economic forecasts could be somewhat revised downwards later this year. It will also be interesting to see to what extent the latest Covid-19 waves will have an impact on the countries’ fiscal and monetary policies. Upcoming weeks and months will tell what the socio-economic consequences will be for the two sub-regions. In the meantime, a certainty is about to emerge: the coronavirus toll in South and South-east Asia is likely to be more severe in 2021 than in 2020.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com