After almost two years of economic misery, there are encouraging signs of better times to come for South-East Asia in 2022.
With the worst of the pandemic apparently over in the region, the restrictions to contain the spread of the Covid-19 virus are being relaxed, allowing domestic demand to regain vigour. At the same time, improving external demand and rising commodity prices are providing a tailwind for recovery. Of course, we cannot forget the many risks that still abound, but our view is that these can be contained.
Rebound drivers
There are four reasons why the pandemic will be less of a drag on economic growth going forward.
First, resistance to Covid infection is building up across the region as vaccinations gather pace and as a large part of the population has already been exposed to the virus. Consequently, the pace of new infections is falling, sometimes precipitously. New cases in Indonesia now number in the hundreds, hugely down from the peak of over 50,000 a day in July. The pattern is similar in Thailand, Malaysia and the Philippines. The surge of infections in Singapore since August is also now diminishing.
There is little appetite among governments to impose economy-crushing restrictions whenever there is a new wave of infections
Second, there is little appetite among governments to impose economy-crushing restrictions whenever there is a new wave of infections. Covid-19 is now seen as an endemic disease, so restrictions on crossborder travel are being relaxed while regulations on social mixing are being eased as well. Singapore is continuing to open travel bubbles with more countries despite having to deal with an unexpected rise in infections.
Third, there is a similar recovery in major economies, such as the US, Europe and Japan. This should spur external demand for the region’s products and raise prices for the commodities being exported.
Finally, policymakers, businesses and consumers have good reasons to believe that even a new and more transmissible variant of the Covid-19 virus can be managed. As vaccination drives cover a progressively higher proportion of the population, the risk of fatalities or extremely serious cases will decrease. Healthcare facilities including those for intensive care have been expanded. The advent of strikingly better treatments for the disease such as molnupiravir and fluvoxamine should bring the mortality rate associated with Covid-19 down sharply, making the disease a much less scary one.
The dislocations caused by the pandemic will dissipate, allowing for a substantial release of pent-up demand
These four factors suggest that the dislocations caused by the pandemic will dissipate, allowing for a substantial release of pent-up demand that will boost exports, tourism and domestic activities.
Ongoing reform
Encouragingly, there are other forces that can further reinforce the upswing in economies. One is that countries in the region have continued introducing reforms even during the crisis.
Indonesia not only passed a bold deregulation of once-stifling labour laws, it also followed up by liberalising the rules on foreign investment. More recently, the Indonesian government announced that value-added tax rates will be raised in stages to generate revenues for economic development and to improve the fiscal position. Encouragingly, the political backlash against these courageous but unpopular moves was easily contained, a good sign for future progress in reforms.
In addition, we expect to see some relocation of production from China to neighbouring manufacturing hubs, due to rising costs in China.
As a result, there are signs that foreign investment will rise not just in Indonesia but elsewhere in the region. That will add to the region’s growth prospects.
China risk
The single most important risk to this upbeat scenario is a recession in China.
There is a danger that financial stresses among China’s highly indebted property developers could crystallise a sharp downturn in the Chinese economy. Other headwinds include the country’s zero-Covid approach, which results in lockdowns that disrupt business activity. The country is also suffering from power outages and other supply chain dislocations.
Finally, well-intentioned policies to rein in the activities of big tech companies and other private sector companies could undermine the confidence of private firms whose investment activities constitute a key engine of China’s growth.
Well-calibrated and timely policy action will be needed to ensure that the downside is prevented. However, China’s policymakers have a good track record in averting such potential shocks and we believe the worst scenarios can be avoided.
In short, without underplaying the risks to growth, we believe there is a good case to be made that South-East Asian economies are poised for substantially better economic performance in the coming year.
