Asia’s road to recovery

Big thinking required to regenerate economy

In 2020, goods export growth in dollar terms was positive in only three Asian countries: China, Taiwan and Vietnam. The Regional Comprehensive Economic Partnership negotiations may result in an intraregional trade boost to Asian countries, but the impact is unlikely to be felt in the short term. As usual with trade pacts, good intentions rarely live up to economic and national agenda realities.

Following the pandemic, countries in the region will have to rely more on domestic growth to restore economic dynamism. This means, in a number of cases, overhauling existing policy frameworks and reorientating them towards attracting investment and freeing up domestic markets.

India and Indonesia have made bold bids to lead the way. Labour law liberalisation and agriculture reform were at the heart of India’s efforts. Dismantling restrictive labour practices and opening to foreign investment are key elements in Indonesia’s omnibus law. Moves towards land titling – long held by Peruvian economist Hernando de Soto as the key to developing country take-off – are also a potential game changer for the archipelago. In the Philippines, charter change (cha-cha) is back on the agenda. The government and its supporters in Congress hope to amend the economic provisions in the 1987 constitution by the end of the year. This would reduce barriers to entry for foreign investors across a range of industries. But in all of these countries opposition to change is entrenched and well-organised. The Indian agriculture reforms appear to have fallen at the first hurdle as widespread farmer protests forced the government to backtrack. It will take steadfast political will, perhaps helped by the cover of pandemic response, to force through long-resisted change.

There has been a wide range of fiscal commitments made by governments across Asia in response to the downturn. Japan and Singapore both committed around 20% of gross domestic product to support measures in 2020 (although, at least half of Japan’s commitment could be classified as quasi-monetary). In poorer countries, fiscal injections ranged between 3% to 5%. Thailand was the one exception, where the government committed 9.6% of 2019 GDP to spending programmes, most of which remain stalled. Just how much of these commitments will be disbursed is open to question.

Monetary policy has been significantly loosened across the region. The largest rate cuts have come in the Philippines and Vietnam, but most countries still have meaningful interest rates. That is a major positive as it imparts an investment discipline on businesses and sends a positive signal about future growth prospects. However, this is not true for Japan, and Korean and Thai where interest rates are worryingly low.

The extent to which economic damage has been averted by these measures will never be known. Governments will claim economic successes and blame Covid-19 for failures. The data will be unable to differentiate. It has been our view throughout 2020 that efforts to support businesses and maintain the prepandemic capital structure were by far the best use of public money. In that respect, government measures have been mixed, with many perceiving the problem to be a conventional aggregate demand shortfall. In reality, government-imposed lockdowns were a severe shock to supply chains.

Interestingly, the take-up of cheaper and semi-guaranteed loans has been generally low. Figure 1 shows the year-on-year growth rate in private-sector lending in 2019 and the first three quarters of 2020. The outturns are remarkably subdued for most Asian countries despite increased loan guarantees, central bank liquidity injections, reserve requirement rate cuts and lower interest rates. Loan growth actually slowed in Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore and Vietnam.

There have undoubtedly been significant trade effects from the pandemic, and surprising ones in some instances. As Figure 2 shows, goods trade has been much more benign across the region in terms of GDP contribution (a rising trade surplus or falling deficit being positive contributors to GDP). Only Korea has experienced a worsening trade balance (though that is also true for the US and the European Union). Malaysia and Hong Kong have experienced the largest percentage gains while Indonesia and Japan have both moved from being trade deficit countries to trade surpluses.

Of course, these ‘improvements’ are a reflection of weak domestic demand. Governments will need to focus on a regeneration of this demand in 2021.

Jim Walker is Chief Economist of Aletheia Capital.

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