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Ready to recover

By EKATERINE VASHAKMADZE | China Daily | Updated: 2020-07-06 07:28

East Asian and Pacific economies are expected to rebound next year, but debt overhangs need to be addressed and damage to potential growth would need to be minimized

The coronavirus pandemic has taken a severe human and economic toll on East Asia and the Pacific region. The World Bank's Global Economic Prospects projects regional growth to slow sharply in 2020, to 0.5 percent-the lowest rate since 1967-reflecting the impact of pandemic-related lockdowns, tighter financing conditions and a deep contraction in exports. Sizable policy support will prevent a more severe deceleration. Although subject to significant uncertainty, regional growth is expected to rebound to 6.6 percent in 2021 as the pandemic subsides, global import demand recovers and capital flows to the region normalize.

However, the balance of risks to the outlook is firmly tilted to the downside. Key risks include a longer-than-expected duration of the pandemic, a prolonged period of heightened financial stress and a sharper-and longer-than-expected contraction in global trade compounded by re-escalating trade tensions.

In China, where highly restrictive measures led to an almost complete halt in activity in some sectors and regions in February, output in the first quarter is estimated to have contracted by 34 percent quarter-on-quarter-the first contraction since 1976. Activity started to recover in early March as the domestic lockdown was relaxed. As of April, industrial production has returned to growth and vehicles sales posted the first increase since June 2018. In the rest of the region, economic conditions deteriorated in March and remained stressed until mid-2020, reflecting national lockdowns and negative spillovers from the rest of the world.

All major regional economies have implemented large macroeconomic policy support to mitigate the economic impact of the outbreak. In China, the central bank has provided substantial liquidity support, cut policy rates, and lowered reserve requirements to stem market sell-offs and support businesses. Other regional economies have also cut monetary policy rates, provided liquidity and credit facilities, and embarked on various asset purchase programs.

Key fiscal policy measures in China included emergency health spending, tax breaks, direct transfers to vulnerable households, deferrals and special local government bond issuances to boost investment, totaling 5.4 percent of GDP. Malaysia and Thailand have both implemented extraordinary economic support packages equivalent to around 17 percent and 13 percent of GDP respectively. Indonesia and the Philippines have announced sizable fiscal stimulus packages ranging around 3 percent to 5 percent of GDP.

Regional GDP growth in 2020 is projected to fall to 0.5 percent-down from 5.9 percent in 2019, 5.2 percentage points below previous forecasts, and the lowest rate since 1967. Regional growth is expected to gradually recover during the second half of 2020 and return to around the pre-pandemic trend by late 2021.

Growth in China is projected to slow to 1 percent in 2020-4.9 percentage points below the January forecast and the lowest rate since 1976-reflecting the significant disruptions caused by the COVID-19 pandemic, and then rebound above its trend pace, to 6.9 percent in 2021.

Growth in East Asia and the Pacific region excluding China is projected to contract by 1.2 percent in 2020-the first contraction since the 1998 Asian financial crisis-and then rebound to 5.4 percent in 2021 as the effects of the virus dissipate.

The pandemic will likely further slow potential growth in the region by weakening investment and the supply chains that have been an important conduit for productivity gains over the past decade. The negative impact is expected to be broad-based and will add to the long-term slowdown from deteriorating demographic trends and falling growth in total factor productivity.

There are multiple risks to the outlook, including a longer-than-expected duration of the pandemic, a prolonged period of heightened financial stress and a sharper-and longer-than-expected contraction in global trade compounded by re-escalating trade tensions. Should the downside risks to the outlook materialize, the regional economy could contract by 1.9 percent in 2020, and growth will remain below trend in 2021.

Major East Asian and Pacific economies appear to be better equipped to cope with this crisis than in the past. They have a strong track record of growth, greater exchange rate flexibility and more robust monetary, and prudential fiscal policy frameworks. The increase in borrowing costs in the region has been generally less pronounced than in other emerging markets and developing regions.

However, vulnerabilities among some regional countries could amplify the impact of external shocks. These include elevated debt (China, Laos, Malaysia, Mongolia and Vietnam), sizable fiscal deficits (Laos and Vietnam), heavy reliance on volatile capital flows (Cambodia and Indonesia) and considerable foreign holdings of domestic debt (Indonesia, Malaysia and Thailand). Achieving long-term sustainable development calls for debt overhangs to be addressed and excessive leverage to be avoided.

On the upside, a gradual normalization of global trade relations remains a possibility, notwithstanding new challenges, and pandemic containment and economic policy support measures in major regional economies could be more effective than expected, leading to sustained recovery of regional growth.

The author is a senior country economist in the Global Macroeconomic Trends Team of the Development Prospects Group at the World Bank. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

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