Indonesia, Philippines well-placed for Asia's "Goldilocks" phase in 2021: report

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SEPTEMBER 30, 2020 - 6:59 PM

ASIA, excluding Japan, is poised for a "Goldilocks" phase of economic growth in 2021, and Indonesia and the Philippines look better placed than their Asean neighbours in this environment, a Morgan Stanley (MS) report has suggested.

The report, which is co-authored by economists based in Hong Kong, Seoul and Singapore, defines "Goldilocks" as "a sweet spot of accelerating and above-trend growth, rising-to-trend inflation, and big easy policy".

It added that such macroeconomic trends would be somewhat reminiscent of 2003/04, 2005/07, 2009/10, and 2015/18, which made for a favourable backdrop for Asia, ex-Japan, as there was ample runway before macro stability risks compel policymakers to tighten in any material way.

While the pace of recovery has been a key point of debate, MS noted that the growth recovery has been set in motion, led primarily by China, Taiwan and South Korea, and Asia ex-Japan as a whole is expected to recover to pre-Covid-19 gross domestic product (GDP) levels by the third quarter. This is expected to "broaden out", with the rest of Asia ex-Japan catching up in 2021.

Meanwhile, while inflation is expected to rise, it is unlikely to get into "overheated territory", MS said.

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The Federal Reserve's average inflation targeting (AIT) framework, manageable inflation, and a still-conservative growth outlook by Asia ex-Japan policymakers also suggest that central banks in the region could keep policy rates lower for longer in 2021, MS said.

At the same time, the Fed's dovish policy is also likely to portend favourable liquidity flows for Asia ex-Japan as growth differentials and real rates differentials between Asia ex-Japan and the US rise in favour of the former and liquidity chases higher returns, MS said. A favourable liquidity environment would also help with the funding of AxJ fiscal deficits, it added.

For South-east Asia, although the biggest pushback on the recovery front comes in Indonesia and the Philippines, MS remains optimistic about the two countries.

Both have higher structural growth rates that would enable them to take larger strides on the recovery path once the growth obstacles are removed, MS said.

"To that end, we note these economies are potentially relative beneficiaries of supply-chain relocation from the medium-term deglobalisation trends," it said.

Although large-scale social distancing measures have been put in place again in Indonesia, they are less strict than what was seen in Q2, MS noted, which means the Indonesian economy is unlikely to further decline sequentially in Q3.

At the same time, Indonesia's state-owned drugmaker Bio Farma has signed two agreements with China's Sinovac for vaccine production and for China to send over potential vaccines, the report noted.

Separately, the Philippines has been in talks with the World Health Organization, Russia, China, the US, and Australia, and it is scheduled to run phase 3 trials of Russia's Sputnik V vaccine from October until March next year, the report added.

"In our view, vaccine availability would more greatly benefit those economies, like India, Indonesia, and the Philippines, where the earlier institutional response to Covid-19 management has faced challenges," MS said.

However, there are other caveats.

MS said its "Goldilocks call" could go wrongfor a number of reasons, including if the Covid-19 situation worsens or if geopolitical tensions escalate. Uncertainty in the US presidential election and credit quality issues weighing on financial intermediation are other factors.

Meanwhile, if growth and inflation surprises "materially" to the upside, this could also leave a narrower window for the Goldilocks phase as policy tightening would come in earlier, MS said.