Southeast Asia: vulnerable for now, but resilient over the longer term

We examine the immediate impact of COVID-19 on markets in Southeast Asia and the potential longer-term effects of the outbreak on the region’s economies, paying particular attention to GDP growth in Indonesia, India, and the Philippines.

The COVID-19 outbreak is affecting Asian economies through many direct and indirect channels. In summary:

Direct channels
  • A decline in tourism revenue
  • Weaker consumer demand for local services
  • A decrease in business cashflow
  • The negative effect of tighter labour mobility on the supply chain
Indirect channels
  • Dwindling Chinese demand
  • Supply-chain bottlenecks and a drop off in production that is being driven by a shortage of parts and components – particularly in economies that are heavily dependent on Chinese imports
  • Less demand from the rest of the world, as the outbreak spreads to other markets
  • Limited access to credit given financial-market volatility 

As with most things in markets, any investment thesis depends on the investment horizon.

In the short term, the market may turn its attention to those economies that could become the next COVID-19 hot spots. Worryingly, there have been rapid increases in the confirmed cases reported in Indonesia, India and the Philippines—these are the region’s more populous economies with a more significant share of its low-income households, thinner social-security nets and weaker health infrastructure. These markets have also recorded a higher proportion of deaths, which suggests that the actual number of virus-related infections could be greater than reported due to their lower testing capacity (a function of health infrastructure). 

Chart showing number of COVID-19 tests conducted per million people in select countries and territories. As of April 8, 2020, the number of individuals tested for the disease per million people in Italy is 874; 838 for New Zealand, 408 for the United States, 337 for Australia, 290 for the United Kingdom, 175 for Malaysia, 108 in South Korea, 38 in Taiwan, 35 in Vietnam, 12 in Thailand, 9 in India, 4 in the Philippines, and 4 in Indonesia

If we look at the longer-term picture, many independent issues have been exacerbated by COVID-19. For instance, a protectionist push is now accelerating across the world, the U.S. dollar is much stronger, and oil-price volatility is creating deflationary pressures, which has implications for credit markets and financial stability. Therefore, rather than a mechanical application of the first in, first out principle, we need a more holistic approach when assessing the potential longer-term economic impact in the region.

Such a view will take into consideration the quality of health infrastructure, testing capacity and fiscal wherewithal of an economy, along with its ability to pivot supply chains and grow domestic demand. Credit and liquidity risk exposures will also be pertinent. While Indonesia, India, and the Philippines may face the near-term risk of local outbreaks, we believe their economies are among the most insulated from a longer-term growth perspective. Indeed, the Asian Development Bank’s recent scenario analysis indicates that these markets are likely to experience the lowest impact on GDP growth, regardless of timescale.  

Chart showing total hit to GDP under a short containment scenario, according to research by the Asian Development Bank. Under this scenario, research from the Asian Development bank suggests GDP in India, Indonesia, and the Philippines will be reduced by less than 1%. Malaysia, Singapore, Hong Kong, Vietnam and Taiwan could see their GDP reduced by between 1% and 1.5%. South Korea, Thailand, Australia’s GDP could be reduced by between 2% and 3%. China could see its GDP reduced by between 4.5% and 5%.
Chart showing total hit to GDP under a short containment scenario, according to research by the Asian Development Bank. Under this scenario, research from the Asian Development bank suggests GDP in India, Indonesia, and the Philippines will be reduced by up to 2%. Malaysia, Singapore, Hong Kong, Vietnam and Taiwan could see their GDP reduced by between 2% and 3%. Thailand and China’s GDP could be reduced by between 3% and 5%. Australia and Thailand could see their GDP reduced by between 5% and 7%.

Conclusion

Near-term newsflow may be negative, particularly as these markets deal with domestic outbreaks; however, the impact of the COVID-19 must also be viewed in a longer-term context. To this end, we believe Southeast Asia should emerge from the pandemic with resiliency. 

 

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect fund performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the fund’s performance, resulting in losses to your investment.

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Sue Trinh

Sue Trinh, 

Senior Macro Strategist

Manulife Investment Management

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