Comment: For Asia, at least, this is not a Depression

June 5, 2020

HONG KONG -- While regional growth will probably contract in 2020 -- worse than the 1997 Asian financial crisis -- this is not the beginning of another Depression, says Trish Nguyen, Senior Economist, Emerging Asia, with the global financial group Natixis.

"Asia's flexible response, such as allowing foreign exchange rates to absorb shocks, will stabilise funding conditions," she says. "Economies with current account deficits are likely to require less external funding as import demand falls."

Nguyen expects the region to recover in 2021. "Worsening demographics and rising debt, as well as deglobalisation, are key risks but also opportunities," she says.

"Companies looking for diversification, growth and lower prices will be attracted to India, Indonesia, the Philippines and Vietnam. The growing need for infrastructure in countries with demographic booms will attract foreign investors."

Nguyen says economic data is "frightful" right now as growth enginesm from retail sales to exports sputter sharply.

"After a supply shock from China's factory closures in February, Asia is confronting both domestic and external demand shocks in the second quarter," she says.

"Mobility restrictions, especially in economies dependent on domestic demand such as India, Indonesia and the Philippines, have suppressed already-shy spenders. Even in countries with "normalised" mobility, self-restraint has left shopkeepers wanting.

"Missing tourists, falling export sales, weakening remittances and cautious foreign investors have put income pressure on current account deficit economies, and even excess-saving ones such as China, Singapore and Thailand."

Nguyen says it is easy to feel depressed. "Asia's GDP contracted in the first quarter, led by China's sharp fall, and Q2 will be worse as many economies extend lockdowns.

"China scrapping its GDP target means we should not count on the country to stimulate regional demand. At the same time, Asia's high dependency on small and medium-sized enterprises for employment will probably result in worse labour market conditions, and, therefore purchasing power.

"After a slow start, some Asian economies are stepping up support. India increased fiscal support by 2.7% of GDP, with funds for lower-income households. The Philippines is proposing an additional US$26 billion stimulus. Indonesia is adding US$43 billion to soften the impact on SMEs. South Korea's New Deal will create jobs and foster industries such as 5G and artificial intelligence."

Nguyen says that, beyond rate cuts, Asian central banks have done more to ease liquidity shocks, from Bank Indonesia buying Government bonds to the Bank of Thailand creating a corporate bond fund. The US Fed has flooded all markets with dollar liquidity through repo and swap lines, she says. (ATI).