Uneven recovery

Uneven recovery

Success of vaccine rollout could determine whether countries revive this year or experience economic pain well into 2022 and even beyond.

Covid-19 has been an unprecedented shock to almost all walks of life in the modern world. Apart from the threat to human health, the persistent outbreak has devastated the global economy, state budgets and corporate balance sheets, prompting policymakers to move swiftly to limit the harm to their economies.

As the pandemic lingers, the economic damages will last for years, limiting the growth potential of countries in East Asia and the Pacific (EAP). Containment measures and lockdowns persist as outbreaks continue in some economies and reemerge in others.

"The near-term outlook remains highly uncertain. The recovery is expected to be uneven and fragile, and the materialisation of a number of downside risks could derail the projected regional economic recovery," the World Bank said in a report issued earlier this month.

"The downside scenario of a delayed vaccine rollout globally features a much weaker and more protracted recovery, with regional growth limited to 0.6% in 2021 and 4.7% on average in 2021-22."

The bank projects global gross domestic product (GDP) to expand by 4% this year, predicated on proper pandemic management and effective vaccination campaigns. But that level would still be 5.3% below pre-pandemic projections. Global growth is expected to moderate in 2022 to 3.8% -- still above its potential pace, but weighed down by lasting damage from the pandemic.

Last week, China reported better-than-expected GDP growth of 2.3% for 2020, propelled by strong expansion of 6.5% in the final quarter, reflecting a relatively rapid recovery from the pandemic that also fuelled exports.

The Asian Development Bank (ADB), meanwhile, estimates that the economy of developing Asia contracted by 0.4% in 2020, with downturns in all subregions except East Asia. Its latest economic update published in December said that although regional growth will rebound to 6.8% in 2021, output will remain below what was envisioned before the pandemic. The estimate for East Asia -- the largest subregional economy in developing Asia -- was upgraded from 1.3% to 1.6% for 2020, with 7.0% growth forecast for this year.

While economic activity has rebounded in recent months, domestic mobility remains below normal, by about 10% in South Asia and 20% in Central and Southeast Asia, said the ADB.

The Manila-based bank has revised down its GDP estimate for Southeast Asia from a 3.8% contraction to 4.4% in 2020, followed by 5.2% growth in 2021, revised down from 5.5%. "GDP forecasts in 2020 are downgraded for Indonesia, Malaysia and the Philippines as Covid-19 containment hampers economic recovery."

Meanwhile, success in reopening economies points to better growth prospects for Brunei, Thailand and Vietnam. Forecasts are unchanged for Cambodia, Laos, Myanmar and Singapore.

"Recent progress in developing vaccines tempers this risk, but vaccines must be not only safe and effective but also delivered widely in a timely way for developing economies to share equitably in the benefits," noted the report.

While China is expected to recover strongly, the level of output in the rest of EAP is expected to remain around 7.5% below pre-pandemic projections in 2022, World Bank senior economist Ekaterine Vashakmadze wrote in a recent blog.

The worst-hit economies have been those with extended lockdowns combined with large domestic outbreaks (the Philippines) or domestic policy uncertainty (Malaysia, Thailand and Timor-Leste), and those with a heavy reliance on tourism and travel (Fiji, Thailand, Palau and Vanuatu). The GDP of Vietnam, which has kept new infections at a low rate, is estimated to have expanded by 2.8%.

"Although the spread of the pandemic appears to have slowed in much of the region, infection rates remain elevated in Indonesia and the Philippines and have been increasing recently in Malaysia. In Myanmar, higher infection rates and new lockdowns are leading to severe increases in poverty and food insecurity," Ms Vashakmadze wrote.

A strong rebound in China could lift regional growth to 7.4% in 2021 but the recovery is expected to be more protracted in the rest of the region. Vietnam, for which exports have remained resilient despite global headwinds, is projected to suffer an output loss of around 4% compared to pre-pandemic projections by 2022.

Standard Chartered, meanwhile, expects global trade to rebound in 2021 as activity resumes and global growth picks up. "The global recovery should support exports through both increased volumes and higher prices. Export volumes have already rebounded from the lows of the second quarter of 2020 and are close to end-2019 levels," the London-based financial group said in its "Global Outlook -- Economic Outlook 2021" report.

"We expect export volumes to pick up further in 2021 as global demand returns -- particularly in the second half of 2021, when vaccines are more widely available and social-distancing measures are relaxed."


Standard Chartered assumes that vaccines will reach large parts of the population by the third quarter of this year. Positive sentiment around vaccines has already boosted equity and commodity markets, although the impact on the real economy may not be apparent for months given production, logistical, epidemiological and social hurdles.

The British financial group said vaccine development and distribution are particularly critical for Asean and South Asia, given the importance of tourism to many Asean economies and the severity of the outbreak in India.

"Vaccine rollout should provide an important boost to the region's growth in 2021. Some governments have reportedly secured vaccine deals with pharmaceutical companies, although widespread vaccination is unlikely before the second half of 2021 given the logistical hurdles in large countries such as India and Indonesia."

India has already begun a massive drive to vaccinate its population, having approved the AstraZeneca jab for emergency use earlier this month.

Local production provided an estimated 40 million doses by end-2020 for emergency use, with another 300-400 million doses expected by July 2021, according to the Serum Institute of India.

The AstraZeneca vaccine is well suited to India given its affordability and much simpler storage requirements than some others. The government aims to vaccinate close to 250 million people by the third quarter. "Success will depend critically on the government's capacity to distribute the vaccine once it is available," Standard Chartered said.

For many countries, access to vaccines that are effective, affordable and promptly available will be a challenge. Covax -- a public-private partnership co-led by the World Health Organization (WHO) that aims to help supply lower- and middle-income countries -- is a potential solution. Nine vaccines are currently in development under the Covax programme, and another nine are being evaluated.

With the demand boost from Covid-related stimulus fading, Standard Chartered also expects some Asean governments to revive their infrastructure pushes in 2021. Indonesia, the Philippines and Malaysia have increased their infrastructure budgets for 2021, after having diverted funds to pandemic measures in 2020.

"While most countries in the region are likely to maintain spending at similar levels to [2020], we expect fiscal deficits to narrow as governments balance concerns about leverage and rating risks against growth considerations; this is particularly true in India."

"Governments should act to ensure equal access for small businesses and the poor to the digital technologies that have become essential since the onset of the pandemic," says Aaditya Mattoo, World Bank chief economist for East Asia and the Pacific. Photo courtesy of WORLD BANK


The watershed US election should bring greater predictability to the world's largest economy and overall global prospects, says Standard Chartered.

"The world will welcome more predictability from the White House," it said of the outlook for the administration led by Joe Biden.

"Mr Biden could bring greater predictability to market-moving geopolitical issues, most notably US-China relations; the constant headline risks that have defined the past four years are likely to diminish under his presidency."

To be sure, the US is likely to maintain its tough stance on China, continuing to pressure Beijing to open up its economy to US exports and investment, protect intellectual property rights and avoid the forced transfer of technology.

"However, Donald Trump's emphasis on the bilateral deficit and tariffs is likely to give way to a more systematic and rules-based approach to the competition with China," the bank said. "The US is likely to seek support from key allies in Europe and Asia as it continues to reassess the world's most important bilateral relationship."

As well, the Biden administration is expected to take a more multilateral approach, which should support global trade and cross-border investment flows, thus benefiting emerging markets.

"Mr Biden is likely to have more leeway on foreign than domestic policy. On foreign relations, he is likely to prioritise coordination with traditional US allies and adopt a more systematic approach to resolving China-US disputes, though the increased technology tensions of recent years seem unlikely to recede."

The Democratic president has also promised to re-engage with international institutions, making good on a pledge to rejoin the Paris Accord on climate change and the World Health Organization on his very first day in office last week. Closer engagement with the World Trade Organization (WTO) and the Organisation for Economic Cooperation and Development (OECD) is also foreseen.

Thiam Hee Ng, the principal economist at the ADB, agreed, saying that there is optimism that the Biden administration will pursue a more multilateral approach. "If this is the case, this can help reduce global trade tensions which can support a stronger recovery in exports for the region," he told Asia Focus.

Thiam Hee Ng, principal economist, Asian Development Bank SUPPLIED


With Covid-19 continuing its spread, the ADB says the first priority for governments across Asia this year is to ensure that the virus is controlled. "Rolling out Covid-19 vaccines efficiently and fairly will be an important part of the recovery process," said Mr Ng.

Countries should also continue to support the poor and vulnerable whose livelihoods have been affected by the pandemic, he added.

"Many industries are being transformed by the impacts of Covid-19. Governments can support the recovery process by supporting the transition to the digital economy and technological products for which demand has surged. Related to this, there should also be investment in educating and training workers in the new skills necessary to thrive in the post-pandemic economy."

Aaditya Mattoo, the World Bank's chief economist for East Asia and the Pacific, said containment and relief efforts today should be evaluated based on their impact on recovery and growth tomorrow.

"First, preparing to distribute vaccines efficiently and fairly will not only facilitate economic recovery but contribute to social stability," he told Asia Focus.

Fiscal reforms, he said, could allow greater spending on relief without sacrificing public investment. Widening the tax base with more progressive taxation of income and profits and less wasteful spending on regressive energy subsidies could make recovery both inclusive and sustainable.

As well, social protection programmes need to be scaled up and investment in delivery infrastructure can help. For business organisations, assistance must be linked to objective criteria related not just to past performance or current pain but their potential to thrive in the future.

"Governments should act to ensure equal access for small businesses and the poor to the digital technologies that have become essential since the onset of the pandemic," said Mr Mattoo.

"These technologies have mitigated the negative effects of school closures on student learning, improved access to health services and bridged producers and consumers through e-commerce and home delivery during lockdowns."

Finally, the recovery needs to be resilient and sustainable. Investments in cleaner energy and green and blue natural assets will be key to tomorrow's employment and economic opportunities, as well as producing local health and global climate benefits, he added.

The World Bank report acknowledged that to counter investment headwinds, there needs to be a major push to improve the business environment, increase labour and product market flexibility and strengthen transparency and governance. These can rekindle investment and help allocate funds more effectively, but unsustainable debt burdens are a major obstacle.

Already at record levels before the pandemic, both domestic and external debt burdens have become much heavier due to the devastating contraction in incomes.

Many governments have helped businesses wealthier the storm through loan guarantees, payment moratoriums and other measures. But as the crisis abates, these policies need to be reassessed to ensure asset quality and avoid undermining bank capitalisation, the World Bank said.

"With non-performing loans likely to rise, more rapid bankruptcy and domestic debt resolution processes will be important in allowing assets to be relieved of litigation and repurposed for new uses. Adding new investment in productive existing assets will be vital for sustainable development."

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