Trinh D. Nguyen (Natixis) | As a region, Asia has done well in dealing with Covid-19 relative to the rest of the world. But not everyone is looking at the 2020 rearview mirror with a self-congratulatory pat in the back: Vietnam, China and North Asia did decidedly better than India and ASEAN economies (excluding Vietnam).
In fact, for some, such as the Philippines and India, the performance was so abysmal that GDP was amongst the worst in emerging markets. The Philippines uniquely had two consecutive quarters of a double-digit economic decline in output.
The sharp fall of GDP by those two economies reflect their lengthy lockdowns, limited fiscal support, and high dependency on domestic demand for growth with a low manufacturing export share of GDP to offset domestic malaise. On the monetary side, they both cut rates rather aggressively and implemented quantitative easing to ease financial conditions and help the government with a widening deficit, as even if expenditure was low, revenue shortfall was also sharp.
While their relative stinginess in fiscally stimulating the economy didn’t give the economy enough pulse to offset the suppression of the private sector, it served as a shock absorber.
For India, the sharp fall of domestic demand led to a huge decline in imports that drove the current account into surplus, giving the country savings during times of crisis. The Philippines also had a balance of payment surplus as its imports collapsed, driven by the large drop in investment and contraction in consumption, which was unprecedented.
But those factors, coupled with low rates domestically and externally, pave the way for not just a financial market rebound but also an economic recovery in 2021, as funding conditions are favourable and balance sheets trimmer. The election of Joe Biden with a likely divided Congress and Senate also assured the continuity of regulatory policy, with the maintenance of low rates and a cheap US dollar regime that is favourable for emerging markets growth.
And there are also signs that the fall from grace was a cold enough ice bucket to wake economics with current account deficits from their slumber and having too much risk on domestic demand and not enough external competitiveness. Countries from India to Indonesia and the Philippines are working on structural reforms to diversify funding sources to attract more FDI and more sources of income.
