Emerging Asia output will stay subdued in 2021

Singapore

ECONOMIC output is unlikely to return to pre-pandemic levels across most emerging Asia economies this year, the Organisation for Economic Co-operation and Development (OECD) said.

For many governments, the key focus this year will be stabilising budget deficits and debt burdens and, in some cases, debt servicing cost. External funding risks will remain the overriding concern for many liquidity-strained governments in the region, it said at a recent webinar.

Unveiling "The Economic Outlook for South-east Asia, China and India 2021 - Reallocating Resources for Digitalisation", the Asia Desk of the OECD Development Centre which prepared the report said the average Asean real gross domestic product (GDP) growth in 2021 is projected at 5.1 per cent, following an anticipated contraction of 3.4 per cent for 2020.

In emerging Asia - Asean-10, China and India - real GDP will increase by 7.4 per cent on average in 2021, after decreasing by 1.7 per cent in 2020.

"Uncertainty surrounding the economic outlook is remarkably high," said Kensuke Tanaka, head of the Asia Desk.

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Ultimately, the recovery prospects for each country depends on many factors such as the length and severity of restrictions, differing initial conditions and economic structures, as well as government capacity to support households and businesses.

It can be hindered by limited policy space, declining foreign currency revenues and an uncertain situation on the health front, including fresh waves of transmission or mutations of the virus.

Vietnam will continue to recover quickly. Growth is projected at 2.6 per cent for 2020 and 7.0 per cent for 2021, as the country benefits from an early end to its lockdown phase and from increasing foreign demand.

India is projected to record the sharpest real GDP contraction among emerging Asia countries in 2020, at -9.9 per cent for 2020, before growing at 7.9 per cent in 2021.

Within Asean, the Philippines is projected to experience the sharpest GDP contraction, at -9.0 per cent for 2020, before growing at 5.9 per cent this year. However, rising debt costs, declining remittances and the capacity of the government to service debt remain major downside risks to the outlook.

The anticipated recovery for Singapore in 2021, projected at 5.0 per cent growth, is highly uncertain and largely depends on external demand.

Elsewhere, China is set to post positive annual growth for 2020 at 1.8 per cent for 2020 and 8.0 per cent for 2021. But a key source of risk to the outlook is the sharp rise in leverage in the public sector and the broader economy.

Nearly all countries are expected to experience a deterioration of their current account balance, with the sharpest corrections in countries highly dependent on tourism and exports.

The OECD report noted that the pandemic has forced governments to make quick decisions and take drastic actions to protect their citizens.

Central banks have brought down key policy rates and reserve requirements for banks in several steps. The central banks of China, India, Indonesia, Malaysia, Myanmar, the Philippines, Thailand and Vietnam lowered policy rates by between 30 and 300 bps in 2020, while the Monetary Authority of Singapore (MAS) has kept its exchange rate-based monetary stance unchanged since April 2020.

China, India, Indonesia and the Philippines also implemented reductions in reserve requirement ratios (RRR) applicable to banks.

"Governments in the region will have much less capability to ramp up counter cyclical policy if recovery momentum falters," OECD said.

After broad-based monetary policy easing during 2020, real interest rates are historically low. With less room for monetary manoeuvre, policy makers across some emerging Asia countries turned to unconventional policy during 2020. It is likely that the focus will change from further rate cuts to improving monetary policy transmission.

The OECD team offered several alternative policy options to facilitate this. One is a monetary policy regime shift in the form of average inflation targeting, or using the natural rate of interest as a supplementary reference of monetary policy.

In addition, a tiered rate of interest system could render low interest rates more sustainable for the banking sector.

It also noted that a raft of support measures in 2020 has stretched budget deficits, constraining governments' capacity to engage in further fiscal expansion.

"With narrower fiscal space, policy makers should devote their attention to improving fiscal multipliers to achieve the dual objective of supporting the economy while restoring fiscal rectitude," Mr Tanaka said.