COVID-19: Twin hits for Asia in 2020, three key risks for 2021

April 24, 2020

HONG KONG - Asia will be hit twice in 2020 by both domestic and external demand shocks, according to the global financial group, Natixis, which says its "rather benign" scenario in terms of growth rebound in 2021 is subject to three key risks. The risks, it says, are:

* A protracted global recession in 2021 as stimulus measures fail, or a new wave for the pandemic;
* Rapid de-globalisation of trade and investment and, possibly an extension of barriers to the cross-border movement of people; and
* A spike in financial risk leading to a domino effect in defaults in the corporate and/or sovereign space.


"Of the three," Natixis says, "deglobalisation trends are more structural, and would lower not only 2020-21 growth rates in the region but their already increasingly-low potential growth in the medium term.",

Natixis says collapse of the Chinese economy in the first quarter, followed by that of the European Union (EU) and US since March, is bound to affect Asia.

"In addition, mobility restrictions, as a consequence of a second wave of COVID-19 infections in some economies and a first wave in others, have increased, with stronger mobility restrictions and a massive economic impact."

Natixis says policy stimulus has generally been slow in Asia, at least compared with the US, although it has been gaining more traction.

"We expect growth in the region to contract sharply in 2020 to -1.9% on average, even worse than the Asian Financial Crisis of -1.2%, with a relative quick recovery in 2021 supported by very lax policies globally.

"More specifically, growth will de-celerate sharply in mainland China, South Korea, Taiwan and Vietnam while contracting in all other Asian economies reviewed.

"The wide divergence in growth expectations hinges on the different degrees of mobility restrictions, as well as the stimulus measures taken so far.

"It goes without saying that the space for stimulus is all the more limited for those with higher dependence on foreign funding."

 Natixis says mobility decline has been sharpest for the Philippines, the least for South Korea.

On the external part of the shock, it says Singapore, Malaysia, Thailand and Vietnam will be more exposed to lockdown outside their borders due to high exposure on trade and tourism, the Philippines and India less so.

Natixis says there is "huge uncertainty" about the size of mainland China's fiscal stimulus down the road, and, thereby, as to the speed of its recovery -- with consequences for the rest of the region.

"In terms of resilience, we believe Indonesia is least resilient due to its highest dependence on external funding for its deficit and also for high foreign investor ownership of domestic securities.

"That said, weaker growth should reduce Indonesia's financing gap as well as recent liquidity support from the Fed.

"As we move towards 2021, suppressed growth in 2020 should help move towards a V-shaped recovery across the board.

"That said, 2021 is not exceptionally positive given the structural reasons pushing potential growth down in the region, the most obvious ones being aging and the piling of debt even more so after the fiscal stimulus in 2020." (ATI).