Regional Outlook 2021 Update

Regional economy: Traversing a bumpy road to exit the pandemic-driven recession 

Economic Outlook for the second half of 2021

• ASEAN region is on the road to recovery driven by rising merchandise exports and FDI inflows, on the back of the improving global economy and normalization of economic activities in advanced economies (AEs). Vietnam, Indonesia, and Cambodia could lead the exit from the pandemic-induced recession. However, the rebound in overall economic activities would not be as strong as previously expected because of latest COVID-19 outbreaks in the region.                               
• The recovery trajectory will be bumpy and there are downside risks, especially from extended outbreaks and the emergence of new variants of concern (VoC) amid a slow progress in vaccination and reports of lower-than-expected efficacy of vaccines. Therefore, the recovery will hinge on the ability of each country to deploy an  effective vaccination strategy.                                                                                                                                                                           
• Economic structure matters this time. Against the backdrop of the two-track global recovery, there are four key conditions for ASEAN countries to achieve a sustainable recovery in 2021:                                                                                                                                                                                            
  1. High degree of trade openness with a large share of exports to AEs and China, as well as lower dependence on international tourism
  2. Maintain accommodative macroeconomic policies and other types of policy support
  3. Implement a credible vaccination strategy and effective deployment
  4. Ability to attract FDI

Based on these, Singapore, Vietnam, Cambodia, and Malaysia could experience a sustainable recovery for the rest of the year.

• Benign inflationary pressure will allow the countries to maintain an accommodative macroeconomic policy at least up to the end of 2021, to nurture the fragile economic recovery trajectory.                                                                                                                                                                                           
• Myanmar would be one of the last to exit the crisis because the political turmoil has hurt its economy. The twin impact of the pandemic and political crisis leading to FDI diversion would undermine macroeconomic stability severely and dampen growth prospects in the medium term. 

Uneven and bumpy recovery ahead amid uncertainties over the latest outbreaks

The economic recovery in ASEAN countries is gaining traction in the second half of 2021 but the pace is uneven and not as strong as previously expected. The lingering pandemic has quelled domestic demand, but growth will be primarily driven by rising merchandise exports on the back of the global economic recovery and the normalization of economic activity in most of the advanced economies (AEs). In this region, Vietnam, Indonesia, and Cambodia would likely experience a sharply rebound and sustainable growth. The exception would be Myanmar, where growth would remain subdued as a result of the twin impact of the pandemic and political crisis. Risks to the near-term outlook are tilted to the downside. The recent outbreaks which have been dominated by the Delta variant is a major risk amid the slow rollout of vaccination and mounting doubts over the efficacy of vaccines to curb infection.

Recovery in global trade and normalization of economic activity in advanced economies will pave the way for ASEAN to exit the pandemic-induced recession

Economic structure matters; a sizeable export-oriented manufacturing sector will accelerate economic recovery

Countries with a large share of export-oriented manufacturing and trade openness such as Singapore, Vietnam, Cambodia, Malaysia, and Thailand could reap the benefits of the recent pickup in global trade. However, to achieve a robust recovery at home, there are more conditions to be met, especially a credible and effective vaccination rollout strategy to boost consumer confidence, domestic demand, as well as domestic tourism. And there needs to be an accommodative macroeconomic policy in place. Countries with the capability to attract FDI are also in a better position to enjoy strong economic recovery. 

Vietnam, Indonesia, and Cambodia will witness stronger economic recovery than regional peers

Vietnam, Indonesia, and Cambodia[1] could lead the exit from the recession. The recovery in global trade is a boon for these countries because of their sizeable share of exports to GDP. Export growth in Vietnam, Indonesia, Cambodia, and the Philippines had surged in the first half of 2021. This was driven by stronger demand for their manufactured products, and soaring prices of several commodities had benefitted Indonesia’s exports. While prospects for international trade are improving, there are imminent near-term risks. These include higher freight rates and lingering trade tension between the US and China.

Strong FDI inflows will continue to spur export-oriented manufacturing and lift domestic business sentiment

Countries in Southeast Asia with strong fundamentals will continue to attract FDI amid the ongoing supply chain diversification and lingering trade tension between the US and China. FDI has played crucial roles in boosting export-oriented manufacturing in ASEAN frontiers – CLMV countries – as well as in Indonesia and the Philippines. 

The recovery path will depend on the pace of vaccine rollout and successful containment of domestic COVID-19 situation

Tourism-dependent economies will see slower recovery

The tourism sector is among that which has been hardest hit by the pandemic, and it is expected to be the last sector to recover as the global pandemic has not been brought under control and new variants continue to emerge. For ASEAN, tourism has been a key growth driver and source of foreign exchange and has provided job and income opportunities for locals. 

Benign inflationary pressures will continue to facilitate accommodative macro policies to nurture still-fragile recovery

We expect most ASEAN countries to continue to implement loose macro policies in the medium-term because they need to nurture the still-fragile recovery. Weak demand-side pressure resulting in muted inflationary pressure on the horizon would allow policymakers to maintain an accommodative policy stance. On fiscal policy, we expect most ASEAN countries to start withdrawing their stimulus packages in 1H23. On monetary policy, we expect BI to keep policy rate unchanged at 3.5% at least until 2H22, and the BSP to hold key rate at 2.0% until the end of 2022.

New waves and VoC present major downside risks to the near-term outlook

ASEAN countries – particularly Singapore and Vietnam – were among the most successful in curbing and controlling the first wave of COVID-19 outbreaks in the first half of 2020. However, the region has suffered from a series of new outbreaks since 1Q this year. This, coupled with the emergence of VoC are the key headwinds that could derail economic recovery.

Surprise US monetary policy tightening could trigger sudden capital outflows and external instability in some ASEAN countries

Given effective control of the pandemic and speed of vaccine deployment, the US is on a strong economic recovery trajectory. Against this backdrop, the Fed is expected to withdraw its ultra-accommodative monetary policy soon. But if that happens sooner-than-expected, it could be  disruptive to economies where capital inflows – particularly portfolio flows – play important roles in financing the current account deficit. This is particularly relevant to Indonesia where foreign holding of local currency (LCY) government bonds is about 23%, higher than its regional peers .

Update on Myanmar: Politics-induced recession would dampen medium-term growth prospects amid sporadic outbreaks

Despite the improved mobility indicators, Myanmar could suffer from an extended politics-induced recession in the medium-term given sporadic outbreaks and slow rollout of vaccines. This is based on most-recent PMI trends which show its export-oriented manufacturing sector – a key growth driver for Myanmar  –  has been hit the hardest. 

Macroeconomic stability has become more vulnerable as FDI inflows might dry up amid persistent twin deficits 

FDI – which has fueled Myanmar’s manufacturing sector and financed its external imbalances - will be diverted to other countries in the region because of lingering political unrest and worsening uncertainties after the coup on 1 February. Without sufficient inflows of FDI, Myanmar’s external stability could worsen due to persistent twin deficits.

Key takeaways: ASEAN economies are on track to recover from the pandemic-induced recession. But there are risks to the near-term outlook

Issues to watch: Vaccination rollout to curb new cases is a common challenge for ASEAN region