Massive recession underway, difficult recovery ahead - Capital Economics
Emerging Asia Economics

Massive recession underway, difficult recovery ahead

Emerging Asia Economic Outlook
Written by Gareth Leather
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With exports collapsing and countries across the region implementing draconian restrictions on travel and commerce, economic activity in Emerging Asia will contract sharply this year. Parts of South East Asia and Hong Kong are likely to be the worst affected economies. Even if the virus is eventually brought under control, weak demand and impaired balance sheets means recoveries will be gradual. Most economies are unlikely to regain their pre-crisis level of output until the middle of next year and will still be 2-4% smaller at the end of 2022 than if the crisis hadn’t happened.

  • Overview – With exports collapsing and countries across the region implementing draconian restrictions on travel and commerce, economic activity in Emerging Asia will contract sharply this year. Parts of South East Asia and Hong Kong are likely to be the worst affected economies. Even if the virus is eventually brought under control, weak demand and impaired balance sheets means recoveries will be gradual. Most economies are unlikely to regain their pre-crisis level of output until the middle of next year and will still be 2-4% smaller at the end of 2022 than if the crisis hadn’t happened.
  • After the deepest downturn in Q1 since the Cultural Revolution, China’s economy will return to growth this quarter. But with labour market strains holding back domestic demand and external headwinds intensifying, output is still set to contract this year. The government’s response has been low-key, but the quasi-fiscal costs of forcing large firms to keep paying salaries and state-owned banks to roll over loans are likely to be substantial and will leave China with a legacy of even higher debt. 
  • The Newly Industrialised Economies (NIEs) of Hong Kong, Taiwan, Korea and Singapore have done a much better job of containing the coronavirus than others in the region. As a result, while domestic demand will fall sharply, it should at least hold up better than elsewhere. But a slump in tourism and a collapse in exports means all four are still heading for big recessions.
  • Strict lockdown measures to contain the spread of the virus are now in place across most of South East Asia. These measures will cause a slump in domestic demand, with the service sector likely to be hardest hit. Thailand, which is being especially hard hit by a collapse in tourism, will contract by more than it did during the 1997-98 Asian financial crisis.
  • Strict containment measures in response to the coronavirus outbreak in India will have severe economic repercussions. We think the economy will grow by just 1% in 2020, which would be the weakest year in four decades. And while the RBI has responded with aggressive monetary loosening, large-scale fiscal stimulus is also needed to support the most vulnerable during the lockdown and to prevent the drastic economic slowdown from morphing into an outright contraction in annual output.
  • The relatively closed economies of the rest of South Asia are not as vulnerable as other parts of Asia to a slump in global demand and a collapse in tourism. But with most economies in lockdown, growth will slow sharply. These countries also have less room to loosen policy. On the fiscal side, budget deficits and government debt are much higher than elsewhere in region. Worries about currency weakness and high levels of foreign currency debt mean central banks will need to be cautious about cutting interest rates.

Key Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

2009-18

GDP

Consumer Prices

World 1

Ave.

2019

2020

2021

2022

2019

2020

2021

2022

China

Mainland China2(2)

19.3

6.8

5.5

-5.0

15.0

4.5

2.9

1.5

1.5

2.0

Hong Kong

0.3

2.8

-1.4

-5.5

9.5

1.5

2.2

1.0

1.0

2.0

Newly Industrialised

 

 

South Korea

1.6

3.0

2.2

-3.0

6.0

3.5

0.4

-0.5

0.5

1.0

Singapore

0.4

4.6

0.7

-5.5

7.0

3.0

0.6

-1.0

0.0

1.0

Taiwan

0.9

2.9

2.7

-5.0

8.0

4.0

0.6

-1.0

-0.5

0.5

South Asia

 

 

Bangladesh

0.6

6.3

8.0

2.0

8.5

7.0

5.5

4.0

5.0

5.0

India

8.0

6.3

5.3

1.0

9.0

6.5

3.7

4.5

5.0

5.0

Pakistan

0.8

4.3

2.5

0.0

3.5

4.0

9.4

8.0

3.0

5.0

Sri Lanka

0.2

5.0

2.8

-2.0

7.0

4.0

4.3

2.0

5.0

4.0

South East Asia

 

 

Brunei

0.03

-0.3

1.0

-5.0

2.0

2.0

0.5

0.5

1.0

1.0

Cambodia

0.10

6.2

7.0

-8.0

15.0

7.0

2.5

2.5

3.0

3.0

Indonesia2

2.6

5.5

4.7

-1.0

7.0

6.0

2.8

2.0

2.5

4.0

Laos

0.04

7.6

6.5

-1.0

9.0

7.0

2.0

2.0

3.0

4.0

Malaysia

0.8

4.7

4.3

-5.0

8.0

5.5

0.7

0.5

1.0

1.5

Myanmar

0.3

6.3

6.5

2.0

8.0

8.0

7.0

7.5

7.5

8.5

Philippines

0.7

5.8

5.9

-4.0

12.0

8.0

2.5

1.7

2.0

3.0

Thailand

1.0

3.8

2.3

-9.0

10.0

5.5

0.7

-1.0

-0.5

0.5

Vietnam

0.5

6.2

7.0

0.5

9.0

7.0

2.8

4.0

3.0

3.0

Emerging Asia

38.2

6.1

4.9

-3.0

12.0

5.0

3.0

2.0

2.5

3.0

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2018, PPP terms (IMF estimates). 2) Forecasts based on our proprietary activity proxies.

Table 2: Central Bank Policy Rates

Forecasts

Policy Rate

Latest

Last Change

Next Change

End

End

End

(15th Apr)

2020

2021

2022

China

Mainland China

7-day Rev. Repo

2.20

Down 20bp (Mar ‘20)

Down 20bp Q2‘20

1.00

1.00

1.50

Newly Industrialised

South Korea

Base Rate

0.75

Down 50bp (Mar ‘20)

Down 25bp Q2‘20

0.50

0.50

0.50

Taiwan

Discount Rate

1.125

Down 25bp (Mar ‘20)

Down 25bp Q2‘20

0.50

0.50

0.50

South Asia

Bangladesh

Policy Rate

5.00

Down 100bp (Nov ‘03)

None on horizon

5.00

5.00

5.00

India

Repo Rate

4.40

Down 75bp (Mar ‘20)

Down 40bp Q2 ‘20

4.00

4.50

5.50

Pakistan

Discount Rate

12.50

Down 75bp (Mar ‘20)

Down 50bp Q2 ‘20

9.50

8.00

7.00

Sri Lanka

Deposit Rate

6.00

Down 50bp (Apr ‘20)

Down 50bp Q2 ‘20

5.50

5.00

5.00

South East Asia

Indonesia

7-day Repo Rate

4.50

Down 25bp (Mar ‘20)

Down 25bp Q2 ‘20

4.00

4.00

4.00

Malaysia

Overnight Rate

2.50

Down 50bp (Mar ‘20)

Down 50bp Q2 ‘20

1.50

1.00

1.00

Philippines

Overnight Rate

3.25

Down 50bp (Mar ‘20)

Down 50bp Q2 ‘20

2.00

2.00

2.00

Thailand

Repo Rate

0.75

Down 25bp (Mar ‘20)

Down 25bp Q2 ‘20

0.50

0.50

0.50

Vietnam

Refinancing Rate

5.00

Down 100bp (Mar ‘20)

Down 50bp Q2 ‘20

4.00

4.00

4.00

Sources: Bloomberg, Capital Economics

Table 3: Financial Markets

Forecasts

Forecasts

Currency

Latest

End

End

Stock Market

Latest

End

End

(15th Apr.)

2020

2021

(15th Apr.)

2020

2021

China

Mainland

CNY

7.06

7.20

7.00

Shanghai

2,815

3,200

3,300

Hong Kong

HKD

7.8

7.8

7.8

Hang Seng

24,275

25,000

28,750

Newly Industrialised

South Korea

KRW

1,217

1,225

1,200

KOSPI

1,860

1,950

2,200

Singapore

SGD

1.42

1.40

1.35

Straits Times

2,635

2,700

3,200

Taiwan

TWD

30.0

30.5

30.0

TAIEX

10,330

10,725

12,175

South Asia

Bangladesh

BDT

85

85

85

DSEX

4,008

4,200

4,800

India

INR

76.3

78.0

80.0

Sensex 30

30,690

34,750

41,000

Pakistan

PKR

168

170

175

Karachi 100

31,160

30,000

34,000

Sri Lanka

LKR

190.5

195

200

Colombo All

3,635

3,750

4,250

South East Asia

Indonesia

IDR

15,650

15,500

15,000

Jakarta.

4,627

4,850

5,550

Malaysia

MYR

4.33

4.50

4.30

KLCI

1,390

1,450

1,600

Philippines

PHP

50.6

53.5

54.0

PSEi

5,950

6,300

7,300

Thailand

THB

32.8

31.5

30.5

Thai SET

1,256

1,250

1,425

Vietnam

VND

23,475

23,500

23,750

Ho Chi Minh

767

1,000

1,100

Sources: Bloomberg, Capital Economics


Emerging Asia Overview

Full recovery from crisis unlikely even by end-2022

  • Asia is in the midst of a devasting recession. (See Chart 1.) Even if the virus is contained, recoveries will be very gradual.
  • Domestic demand is being hammered as restrictions on the movement of people are extended and expanded to prevent the spread of the coronavirus. Large parts of South and South East Asia are now under lockdown. Google data on the movement of people (see Chart 2 and our coronavirus tracker page) indicate that service-sector activity in much of the region is grinding to a halt.
  • Even in places such as Taiwan and Korea, which have done a better job of containing the virus, social distancing means retail and leisure sectors are being hit hard.
  • External demand is collapsing too. We are forecasting a deep global recession, with world GDP set to fall by 3.5% this year, which would be a sharper fall than during the global financial crisis. (See Chart 3.) The region’s most trade-dependent economies, including Singapore, Malaysia, Thailand and Vietnam (see Chart 4.), are likely to be hit hardest by a slump in external demand.
  • Meanwhile, tourism across the world has ground to a halt and is likely to be the last sector of the global economy to recover. Cambodia, Thailand and Malaysia are the most vulnerable. (See Chart 5.)
  • Economic recoveries are unlikely to take hold until there are clear signs that the virus has been contained. Our base case is that this won’t happen in most countries until the third quarter. However, as the experience of China demonstrates, while an initial increase in activity can happen rapidly once lockdown measures are eased, this will soon run into constraints resulting from subdued demand.
  • Services will lag manufacturing. Lockdown measures may have to be tightened again if infections reappear. Further ahead, higher debt levels as a result of the stimulus measures introduced during the crisis mean a prolonged period of austerity is likely once economies are back on their feet. Some sectors, notably tourism, will struggle to fully recover.
  • Interest rates have been cut nearly everywhere, with further policy loosening likely over the coming weeks. (See Chart 6.) But with firms reluctant to invest and consumers unwilling or unable to spend, they will not be as effective as normal at stimulating demand.
  • However, central banks still have a role to play in trying to ensure that financial markets function properly and that otherwise-healthy companies can make it through the crisis. The Bank of Korea has already unveiled a series of unconventional measures aimed at lowering financing costs for banks and ensuring that companies can continue to access credit. Other central banks are likely to follow suit.
  • The job of supporting domestic demand will fall mostly on fiscal policy. Most countries have unveiled fiscal stimulus packages, with the most generous so far being in Singapore, Malaysia and Thailand. Relatively low debt levels mean most countries could afford to loosen policy more aggressively. (See Chart 7.)
  • Looking across the region, our assessment is that Thailand and Hong Kong will be the worst-affected countries this year. (See Chart 8.) Many economies are unlikely to regain their pre-crisis level of output until the middle of next year, and will still be 2-4% smaller at the end of 2022 than if the crisis hadn’t happened.

Overview Charts

Chart 1: Emerging Asia GDP (% y/y)

Chart 2: % change in number of people at work (relative to 3rd Jan. to 6th Feb. baseline)

Chart 3: Global GDP and Asian* Exports (% y/y)

Chart 4: Exports of Goods and Services (% GDP)

Chart 5: Tourism Spending (% of GDP)

Chart 6: Change in Policy Rate (bps)

Chart 7: Government Debt (% of GDP)

Chart 8: 2020 GDP (% y/y)

Sources: Refinitiv, CEIC, ADB, Google, CE


China

Past the worst but recovery to underwhelm

  • After the deepest downturn since the Cultural Revolution in Q1, China’s economy will return to growth this quarter. But with labour market strains holding back domestic demand and external headwinds intensifying, output is still set to contract this year and remain below the pre-virus path well into 2021.
  • China’s economy was growing rapidly at the end of 2019 but was derailed by efforts to contain COVID-19. The data for the first two months of the year (which are combined) were very weak, with industry and services activity contracting around 13% y/y. (See Chart 9.) A slump in cement output suggests that activity on construction sites also halted. (See Chart 10.)
  • The March data are set to be even worse. Despite evidence of a recovery last month, output still looks to have been lower than the average across the first two months of the year (the COVID-19 containment efforts only began in earnest in late January). All told, we think GDP contracted 20% q/q in the first quarter (a fall of 16% y/y). (See Chart 11.)
  • With most social distancing restrictions now lifted, the economy is past the worst. The daily activity indicators that we track have improved in recent weeks. Output should return to growth this quarter. That said, a rapid recovery to the pre-virus path is unlikely.
  • For a start, even in the absence of restrictions, lingering concerns about the virus are keeping many consumers and workers home. Passenger traffic remains well below normal levels. (See Chart 12.) And around a fifth of the migrants that left the cities ahead of Lunar New Year have yet to return. Meanwhile, the shutdowns will leave a legacy of job losses and firm closures that will take time to reverse.
  • Public records suggest that at least half a million firms were dissolved in Q1 and more are likely to close shop before long. Many SMEs only have enough cash to last a few months amidst the current weakness in sales.
  • The unemployment rate jumped in February (see Chart 13), with surveys pointing to further layoffs in March, and it will probably remain elevated in the coming months. The quarter of the urban workforce that are self-employed or part of family-run businesses will also remain cautious given the recent hit to their incomes.
  • Another near-term headwind is the disruption outside of China, which we think will lead to the sharpest global contraction since WWII this quarter. This looks set to pull down exports, which drive 15% of China’s GDP, by as much as 50%. (See Chart 14.)
  • The global weakness will slow China’s recovery. We now expect GDP to fall 5% this year (our prior forecast was -3%). This would be the first annual contraction since 1976.
  • But at a global level, China will outperform most other major economies. Its shutdowns, while severe, were shorter than now seems likely elsewhere. And while a renewed outbreak is still a risk, China’s containment efforts look to have been effective.
  • Meanwhile, although policy support has been low-key relative to China’s post-GFC stimulus, state control of the much of the financial system has minimized defaults and kept credit growth stable even amidst the slump in demand. (See Chart 15.) This has averted layoffs on the scale now being seen elsewhere. While we think the economy won’t return to its pre-crisis trend until well into 2021 (see Chart 16), that would still be much earlier than looks likely for other countries.

China Charts

Chart 9: Industry and Services Activity (% y/y)

Chart 10: Construction Activity (% y/y)

Chart 11: GDP

Chart 12: Passenger Traffic (% of 2019 level, 7d ave.)

Chart 13: Surveyed Unemployment Rate (%)

Chart 14: Exports & Trade Partner GDP (% y/y)

Chart 15: Broad Credit Outstanding (% y/y)

Chart 16: GDP (Q4 2019 = 100)

Sources: CEIC, Baidu, Capital Economics


Newly Industrialised Economies

Deep recession despite effective containment of the virus at home

  • Domestic demand in the Newly industrialised economies (NIEs) of Hong Kong, Taiwan, Korea and Singapore should hold up better than elsewhere in the region, but a slump in tourism and a collapse in exports means all four are heading for big recessions.
  • The NIEs have had varying success in preventing COVID-19 infections. Taiwan has so far avoided large-scale domestic transmission and the government has imposed only minor restrictions on economic activity. South Korea had a large outbreak early on but has contained it without a national lockdown. If these trends continue, retail and other domestic spending should hold up relatively well in both places.
  • By contrast, the number of new cases has risen recently from a low base in Hong Kong and Singapore. (See Chart 17.) That has triggered restrictions and, in the case of Singapore, a full lockdown which is already having a noticeable impact on activity. (See Chart 18.)
  • However, even Taiwan and Korea face a daunting outlook. The NIEs are among the most trade-dependent economies in the world and will all be hard hit by the slump in global demand. The collapse in global tourism is an additional challenge for Hong Kong and Singapore.
  • Monetary policy has been loosened. Because of their exchange rate regimes, interest rates in Singapore and Hong Kong track those of the US Federal Reserve. The Fed Funds rate is now back at levels reached in the aftermath of the global financial crisis and is likely to remain there for the foreseeable future. (See Chart 19.)
  • The Monetary Authority of Singapore (MAS) has also loosened policy by flattening its policy band and recentring it on the prevailing rate. (See Chart 20.)
  • Taiwan and Korea have cut policy rates and are likely to lower them further. (See Chart 21.) But with rates at 1.125% and 0.75% respectively, both are approaching the limits of conventional policy.
  • More radical measures, such as QE may soon be adopted in these two countries. But with QE’s underwhelming track record at boosting growth and inflation where it has been tried before, the onus for supporting demand will be on fiscal policy.
  • Singapore has announced the largest fiscal stimulus in the region, equivalent to around 12% of GDP. Hong Kong and Singapore have large fiscal reserves making large-scale stimulus affordable. But low debt in Taiwan and Korea mean policy could be loosened more there too.
  • Inflation is likely to turn negative in the NIEs over the coming year. (See Chart 22.) Widespread lockdowns have reduced global supply capacity and may lead to shortages of certain products. But over the months ahead any resulting upward pressure on prices will be outweighed by disinflationary forces.
  • Falling oil prices will cause energy price inflation to fall sharply. (See Chart 23.) Meanwhile, demand will remain depressed. Core inflation dropped sharply in the NIEs during the global financial crisis. (See Chart 24.) The downturn we are anticipating this year is likely to be even deeper.
  • Low inflation will allow policymakers to keep policy accommodative for the foreseeable future. But with output likely to remain below potential for some time, there is a growing risk that inflation will remain negative. As the example of Japan shows, when deflation becomes entrenched, it can be hard to get out of.

Newly Industrialised Economies Charts

Chart 17: Confirmed Coronavirus Cases

(log scale, T = 1st case)

Chart 18: Singapore Peak Time Congestion

(difference from a year ago, %-points)

Chart 19: Federal Funds Rate and Hong Kong
and Singapore Local Interest Rates

Chart 20: Singapore Nominal Effective Exchange Rate

Chart 21: Taiwan and Korea Policy Rates (%)

Chart 22: NIEs* Consumer Prices
(% y/y, simple average)

Chart 23: Oil Prices and Emerging Asia Energy Prices
(% y/y)

Chart 24: Emerging Asia GDP & Core Prices
(% y/y)

Sources: Refinitiv, Capital Economics, Google, Bloomberg


South East Asia

Output unlikely to return to pre-crisis level until the middle of next year

  • Most economies in South East Asia will contract in 2020, and although growth rates will bounce back strongly next year (see Chart 25), a full recovery is unlikely even by the end of 2022. Thailand, which is being especially hard hit by a collapse in tourism (see Chart 26), will be the worst affected economy.
  • Merchandise exports are slumping in response to the collapse in global demand. Malaysia and Vietnam are among the most trade-dependent economies in the world. Indonesia and the Philippines are much less vulnerable. (See Chart 4 again.)
  • With the number of new cases of coronavirus increasing rapidly across the region (see Chart 27), most countries have introduced restrictions on the movement of people and ordered non-essential businesses to close.
  • In most cases, the restrictions have initially been brought in for only a few weeks. However, experience from elsewhere suggests that to be successful they will need to remain in place for much longer. Our base case is that for most countries, the shutdowns will remain in place in some widespread form for three months.
  • The shutdowns are having a huge impact on domestic demand. The daily data we track such as for cinema sales (see Chart 28) and traffic congestion (see our coronavirus tracker page) indicate that service-sector activity in large parts of the region is grinding to a halt.
  • The manufacturing PMIs for March suggest that industrial activity is also being hit hard. And with demand collapsing, the industrial downturn will get a lot worse. (See Chart 29.)
  • A slump in economic activity and a sharp fall in oil prices will put significant downward pressure on prices over the coming months. We expect inflation to fall across South East Asia this year, with Thailand set to experience a period of deflation. (See Chart 30.)
  • With economies in freefall and inflation set to drop sharply, fiscal and monetary policy are being loosened dramatically. On the fiscal front, relatively low debt levels mean most countries have room to loosen policy further. Indonesia has even amended its constitution to allow the budget deficit to exceed the 3% limit that was introduced in the aftermath of the Asian financial crisis.
  • Policy rates have been cut across the board, and we expect further aggressive cuts in most places. (See Chart 31.) The two exceptions are Thailand and Indonesia. Having cut interest rates by 50bp since the start of the year, the policy rate in Thailand is just 0.75%, which limits the scope for further aggressive rate cuts. The Bank of Thailand will soon need to consider unconventional policy options.
  • A high level of foreign currency debt means Bank Indonesia (BI) needs to keep a careful eye on the rupiah, and we think it will proceed gradually with its easing cycle. Although the currency has rebounded over the past week, it is still down over 10% since the start of the year and is close to the all-time lows it reached during the Asian financial crisis. (See Chart 32.)
  • In addition to Thailand, the Philippines and Malaysia will experience the biggest falls in GDP this year. Although GDP should rebound strongly in 2021, output is likely to remain significantly below its pre-crisis trend even at the end of the forecast period in 2022.

South East Asia Charts

Chart 25: GDP (% y/y)

Chart 26: Bangkok Airport International Arrivals (000s)

Chart 27: Confirmed Coronavirus Cases


(log scale, T= 100th confirmed case)

Chart 28: Cinema Ticket Sales (US$mn)

Chart 29: Manufacturing PMIs

Chart 30: Thailand Consumer Prices (% y/y)

Chart 31: Policy Rates (%)

Chart 32: Indonesian Rupiah to US Dollar

Sources: Refinitiv, CEIC, CE, WHO


India

Growth to slow to four-decade low in 2020

  • The rapid spread of the coronavirus in India, and the aggressive measures to contain it, will have severe economic repercussions. We are forecasting growth of just 1% this year, the weakest pace of annual growth since 1979. And the risks are firmly on the downside.
  • The number of recorded cases of coronavirus in India is on a sharp upward trajectory (see Chart 33) and the true number of cases is likely to be higher still, given India’s limited testing capacity. (See Chart 34.) In response, the government has enacted several containment measures, most notably an extended six-week shutdown requiring most people to stay in their homes.
  • Social distancing isn’t an option for many in India – for example, only 16% of households have running water in their homes. (See Chart 35.) And policing activity in the enormous informal sector (see Chart 36) is virtually impossible.
  • Our base case is that the shutdown will continue in some form across much of the country for three months. This will have enormous economic repercussions. Large parts of the manufacturing, construction, transport, retail, leisure and recreation sectors will grind to a halt. Other sectors of the economy will slow significantly too.
  • Compounding all of this, the failure of Yes Bank – India’s fifth largest private lender – will cause further risk aversion among banks and curtail lending if and when demand picks up. In all, we think the economy will grow by just 1% this year, the weakest annual pace of growth since 1979. (See Chart 37.)
  • With businesses set to take a pummelling and many households in India having thin savings buffers, the onus has fallen on monetary and fiscal policy to support the economy. The RBI has stepped up with hefty rate cuts and large-scale liquidity injections to help ensure financial stability. And it has left the door open for further easing.
  • By contrast, the finance ministry’s response has been timid so far. The total stimulus announced in response to the virus outbreak amounts to just 0.7% of GDP – far lower than in many other countries. (See Chart 38.) If the Finance Ministry is able to match the scale of the RBI’s response, it could help prevent the drastic economic slowdown from spiralling into an outright contraction in annual output this year.
  • That said, the risks are still firmly on the downside and the virus could prove to have more insidious and long-lasting effects.
  • For one example, the panic in global markets caused by the virus has meant that foreign portfolio flows out of India’s markets have surged to almost treble the peak during the “Taper Tantrum” in 2013, which pushed India to the brink of a balance of payments crisis. (See Chart 39.)
  • Admittedly, higher foreign exchange reserves and a smaller current account deficit (see Chart 40) that is comfortably financed by relatively stable inflows of FDI mean that the external position looks far more secure now.
  • But an extended period of risk aversion could force the RBI to deploy its FX reserves, while the sudden halt in global economic activity could threaten even remittance inflows. This would intensify concerns over the external position and potentially prolong the domestic slowdown.

India Charts

Chart 33: Number of Confirmed Coronavirus Cases
in India (Latest = 14th Apr.)

Chart 34: Number of Coronavirus Tests
(Per Million People, Latest)

Chart 35: Households with Running Water
(% of Total, Latest)

Chart 36: Non-Agri Employment in Informal Sector
(% of Total, 2018)

Chart 37: GDP (% y/y)

Chart 38: Announced Fiscal Stimulus in Response to Coronavirus (% of GDP)

Chart 39: Daily Net Foreign Portfolio Inflows
(INRbn, Rolling 1m. Sum, Latest = 13th Apr.)

Chart 40: Current Account Balance
(4Q Sum, % of GDP)

Sources: WHO, OurWorldInData, ILO, Refinitiv, CEIC, CE


Other South Asia

Shutdowns may prove ineffective

  • Poor healthcare systems (see Chart 41) and the impracticality for many of social distancing will make it hard for countries in South Asia to contain the coronavirus. And with less room to loosen fiscal and monetary policy, a deep downturn looms. (See Chart 42.)
  • South Asia’s relatively closed economies are not as vulnerable as other parts of Asia to a slump in global demand. Sri Lanka is an exception: spending by tourists is worth around 5% of its GDP. Bangladesh and Pakistan are much less reliant on tourism and are not highly dependent of goods exports either.
  • While the number of confirmed cases of coronavirus in these countries is still low (see Chart 43), it is rising rapidly. Authorities across the region have introduced tough restrictions to try and contain the outbreak. This has led more people to stay at home and avoid public transport as well as retail and entertainment venues. (See Chart 44.)
  • Despite the measures now in place, South Asian countries may struggle to contain the virus. Stay at home orders are more likely to be effective in places such as Korea, where the median household is just 2.5 people, compared with Pakistan where it is 6.6. (See Chart 45.) Chinese researchers found that a large share of infections in Wuhan (the city where the virus was first reported) were taking place within households.
  • Similarly, the lack of modern sanitation in a country such as Bangladesh, where just 4% of homes have running water (see Chart 46), and the impracticality for many of working from home or living off savings for a while will make social distancing harder to achieve.
  • In a worst-case scenario, lockdowns could fail to contain the virus, while still inflicting severe economic pain on citizens unable to earn a living.
  • Failure to contain the virus would not only lead to a humanitarian crisis but would lead to much slower economic recoveries as people are unable to work and foreigners avoided the region.
  • Countries in South Asia have limited room than to loosen policy. On the fiscal side, budget deficits and government debt are already much higher than elsewhere in the region. High bond yields in Sri Lanka and Pakistan (see Chart 47) could also act as a constraint on fiscal policy. The one positive is that since both Pakistan and Sri Lanka are already on IMF loan deals, additional financing could be provided without too much delay.
  • On the monetary side, both Pakistan and Sri Lanka have cut interest rates since the crisis began. Falling oil prices and a slump in growth will put downward pressure on inflation over the coming months, further rate cuts are likely in both countries. (See Chart 48.) The recent narrowing of external deficits in both countries means the IMF is likely to be supportive.
  • However, high levels of foreign currency debt mean the timing and pace of further cuts will be determined at least in part by the performance of their currencies. Big currency falls push up the local currency value of FX debt, making it harder to repay loans and potentially forcing companies and consumers into bankruptcy. Foreign currency debt in Sri Lanka is equivalent to around 50% of GDP, which is one of the highest in the EM world.

South Asia Charts

Chart 41: Healthcare Spending (% of GDP)

Chart 42: GDP (% y/y)

Chart 43: Confirmed Cases of Coronavirus

(T = 100th confirmed case)

Chart 44: % change in number of people at work (relative to 3rd Jan. to 6th Feb. baseline)

Chart 45: Number of People per Household

Chart 46: Household with Running Drinking Water in the Home (% of total)

Chart 47: EMBI Bond Spreads Over Treasuries
(Latest, bp)

Chart 48: Policy Rate (%)

Sources: Refinitiv, Capital Economics, Google