The economic situation in Southeast Asia post Coviv-19

Southeast Asian economies are having a big impact from the global economic crisis caused by the spreading of the pandemic. The economic impact will be huge, maybe like the fallout of the 1997-98 Asian Financial Crisis. On the one hand, ASEAN economies are better prepared than they were in the Asian Financial Crisis that hit the region more than two decades ago, with larger foreign exchange reserves and overall better macroeconomic positions compared to their situation in the late 1990s.

Anyway, the economic shock from Covid-19 may be deeper and longer lasting depending on how the pandemic plays out, and there is vast uncertainty surrounding the ongoing spread and ultimate containment of the virus.

Experts expect to see a sharp slowdown in all of the ASEAN economies in 2020. We have been able to analyse latest forecasts from the World Bank, the Asian Development Bank (ADB), and IMF World Economic Outlook.

They all see sharp declines in regional growth as a result of the economic shock of this pandemic, but they offer a range of projected growth. The IMF projects ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) growth at – 0.6 percent in 2020.

The World Bank report, released in the beginning of April, includes both a baseline and a more pessimistic scenario, with the “lower-case” forecast projecting contractions of the major developing ASEAN countries in the -0.5 percent to -5.0 percent range, with the exception of Vietnam, which maintains positive (+1.5 percent) growth.

Although they measure a slightly different group of countries, the worsening of economic conditions and the ongoing spread of the crisis has lowered forecasts by these international financial institutions over the course of just a few weeks.

However, despite the increasingly pessimistic forecasts for the region, both the IMF and ADB project a strong rebound in 2021 which is a very positive signal. The IMF projects growth for the ASEAN-5 to bounce back to +7.8 percent in 2021, while the ADB sees growth for Southeast Asia rebounding to +4.7 percent next year. In short, they see the global economic crisis brought on by the Covid-19 pandemic as a huge but relatively short-term shock.

Country-specific impacts will depend on the structure of each economy and their initial economic conditions heading into the crisis. Hardest hit will be Thailand, which was already struggling in 2019 and early 2020 with a severe drought, budget delays, and a strong currency and was somewhat slow to respond to the onset of the pandemic.

All three of the April IFI reports forecast a major contraction for Thailand in 2020 in the range of – 4.8 percent to – 6.7 percent. The closely entwined economies of Malaysia and Singapore are forecast by the ADB to see close to 0 percent economic growth this year, with only Malaysia expected to rebound strongly next year.

In light of this, short-term forecasts are very negative, but long-term forecasts predict a good recovery

The crisis resulting from covid19 is affecting the Southeast Asia region in several ways: one of the most important ways concerns investments and tourism. ASEAN countries are highly open to trade and investment as well as tourism, all of which have been severely disrupted by the spreading global pandemic. Demand for these countries’ exports; manufactured components from Malaysia, Vietnam, and the Philippines, textiles from Cambodia have fallen sharply and will continue to stagnate throughout the crisis. Singapore had already been hit by declining services trade and tourism.

ASEAN economies have a diversified set of trade and investment partners, including the United States, European Union, China, and intra-ASEAN trade.

The analysis of the repercussions of Covid19 in the economy of Southeast Asian countries also indirectly involves the European Union.

Last month, the European Council gave the go-ahead for trade and investment protection agreements between the European Union and Vietnam. The Treaty, defined by the European Commission as “the most ambitious free trade pact ever signed with a developing country”, is the second trade agreement signed by the EU with a state of the Association of Southeast Asian States after the one with Singapore, which entered into force in November 2019.

The conclusion of these agreements constitutes a significant economic result for the EU presence in the area, as they guarantee European companies a privileged access channel to two of the most important markets in the region.

The economic crisis triggered by the coronavirus could have repercussions on the economic prospects of this new “alliance”. Recently, the ASEAN area has been called “the new China”, since a significant portion of investments previously directed towards Beijing has been “diverted” to the states of the area in recent years.

 However, due to the severe contraction in trade over the past two months, the United Nations Conference on Trade and Development (UNCTAD) has predicted a “rapid deterioration” in the flow of global investments, like IMF, ADB and World Bank’s forecasts. For the EU, this could mean that the two recent investment protection agreements – which constitute an important section of the trade treaties signed with Singapore and Vietnam – are actually losing importance, but they could restore it from next year.

By Domenico Greco

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