By Sally Marshall (Imperial College London)
Photo: Andre Benz (Unsplash)
Introduction
Since the outbreak of the COVID-19 pandemic emerging economies in the East Asia and Pacific Region, as the epicentre of the disease, have faced severe damage. Regional growth across the region is expected to slow to 0.5%, the lowest rate since 1967.
Despite the region being home to some of the worst affected countries, with the likes of India seeing GDP contractions of almost 24%, countries such as China and Taiwan have seen economic growth, bucking the global trend. As the future of second waves and re-escalating trade tensions looms, there is still much uncertainty regarding the region’s recovery. If economies are able to withstand long time financial stress and with suitable policy support, the region’s growth may be able to meet expectations of 5.4% growth in 2021.
India – Worst Economy Contraction in Decades
Once the world’s fastest-growing economy, with over 6 million coronavirus cases and one of the world’s strictest lockdowns, India has seen its economy contract by 23.9% (25.2% non-annualised) in the April-June quarter, its first contraction since 1980. The COVID-19 pandemic & resulting financial crisis has triggered the loss of approximately 19 million jobs in the formal sector, with economists warning the damage could be much worse within the informal sector, a predominant sector in India’s economy.
Despite a $266 billion stimulus package announced in May by Modi’s government, economists warn that consumer demand is yet to recover. Revenues are expected to plunge and a fiscal deficit is expected to rise up four percentage points above usual levels, leaving the future of the Indian economy uncertain. Add onto this the likelihood of this number being revised downwards, as more data is collected; calls for a stronger fiscal package to boost demand seem justified.
However, an expected catch-up in industrial activity and restart in construction has left economists anticipating a slower GDP contraction in the coming quarter, at approximately 12% contraction. Optimism remains as measures ease, as quoted by Kotak Mahindra Bank, “We can say the worst is behind us”.
Philippine Peso – Asia’s Best Performer
The Philippine Peso continues to strengthen, seeing a rise of around 4% against the U.S. dollar to become Asia’s best performer at this point in the year. This comes alongside the country’s GDP facing one of Asia’s worst contractions in the 2nd quarter, coming in at a rate of 16.5%.
A steep decline in imports to the country compared to exports, due to the weak domestic economy, has left the Philippine’s current account in surplus; which alongside foreign buying of Philippine bonds has helped grow the country’s foreign currency reserves. This has allowed the economy to weather external shocks better than many of its regional peers.
However, Bloomberg reports the best days may be over for the peso. With volatile world markets, many investors are steering clear of excess exposure to emerging markets, in favour of safer investment options. Combining this with a reopening economy, which may tip the current account back in favour of exports, speculation for the currency’s future remains. Although with the outlook for global economic activity looking muted, continued appreciation in the peso can’t be ruled out.
Taiwan – Tech Driven Resilience
Unlike many of its regional counterparts, Taiwan’s limited reliance on tourism and hospitality sectors has been a blessing. As working from home becomes the norm and demand for technological goods surges across the world, the economy has weathered the pandemic well due to its manufacturing expertise in technology that powers artificial intelligence and 5G servers. In addition to the country’s rapid containment of the spread of coronavirus, this has helped achieve the 1% growth in GDP, a global anomaly along with China. Unemployment sits at 4% compared to a 9.4% average in advanced economies.
Factories in Taiwan have continued running at full speed, making the country attractive to European investment, as evidenced by the 10.56% rise in overall direct foreign investment in the country from January-June, compared to the 40% decrease worldwide. With the China-US trade war tensions heightening, foreign tech service providers are looking elsewhere for ‘safer’ options for hardware providers, specifically the semiconductor industry. The prospect of a US-Taiwan trade deal will only support the foreign interest.
Remittance boom or bust?
Defying expectations from the pandemic, migrant Asian workers are sending record amounts of remittances – money home to their communities. Many emerging economies across Asia see migrant workers sending a steady flow of money back, specifically from the oil-rich Middle East, which has helped support the economies in crucial times.
As oil demand dries up and drying up job opportunities caused by strict lockdowns in the Middle East, the boom may just be an indication of worker’s return home as they send money in advance. Remittances are expected to drop 12% in the second half of 2020 compared to that of last year. For countries such as the Philippines, where remittances make up 10% of the economy, this could have devastating consequences.
Earlier this year, the World Bank predicted a 20% drop in the money sent back by migrant workers. Dilip Ratha, lead economist on migration and remittances at the World Bank based in Washi “High unemployment rates among foreign-born workers in major host countries and associated financial difficulties are expected to dampen the flow of remittances.” The continued effects of the pandemic on the developed economies which support emerging markets across Asia through remittances may determine the current wobbly-looking recovery in the region.