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Economic Research: Delay Risk On The Rise For Southeast Asia's Recovery


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Economic Research: Delay Risk On The Rise For Southeast Asia's Recovery

Southeast Asia has been struggling with sporadic outbreaks of COVID-19. The major emerging markets in this region--Indonesia, Malaysia, the Philippines, and Thailand--are living with the effects of new waves that only recently look to have peaked. S&P Global Ratings believes this could prolong their paths to recovery.

Our baseline estimates still assume emerging Southeast Asia will return to its pre-pandemic level of GDP around August of this year. However, delay risks are rising, and a prolonged trajectory would drag on the region's growth rate and lead to higher permanent economic costs.

We assess the implications for the recovery path of pandemic-related delays in achieving above-trend growth. At the same time, there are upside risks to the recovery path, especially external demand, which we do not explicitly incorporate in our scenarios.

We hold off on revising baseline growth expectations for emerging Asia economies for now. We will await further clarity on some key uncertainties that will influence our baseline forecasts. These include the magnitude of fiscal stimulus in the U.S. and its growth impact, the speed of recovery in China, and the evolution of the pandemic in the region.

Hospitals Are Fuller, Streets Emptier

Reported cases per capita in Southeast Asia remain far lower than in Europe or the U.S. but these data should be treated with caution. Given limited testing capacity, a more important indicator for government policies is hospital capacity. In some countries, especially Indonesia, hospital capacity is strained, suggesting widespread outbreaks that have only recently begun to ease.

As hospitals filled up with COVID patients in recent months, governments again restricted mobility and households voluntarily stayed home more often. Through late 2020 and into the early part of the new year, mobility stalled and then fell, most dramatically in Malaysia. Still, this did not lead to a return to the harsh lockdowns of early 2020 that caused mobility to fall to less than half of normal levels in some cases. Governments have been wary of tightening too much on a population that is fatigued with restrictions and whose incomes have already been hammered by the pandemic.

Chart 1


Vaccine Rollout On Track

Emerging economies in Southeast Asia have secured enough vaccine doses for 40%-50% of their populations on average, although efficacy of the vaccines and timing of distribution remain unclear. We still assume a broad vaccine rollout will be in place by the second half of 2021. An early starter is Indonesia, which has begun distributing the Sinovac Biotech vaccine, although the evaluation of this particular vaccine's efficacy has not been finalized by the World Health Organization [1].

Achieving full population coverage will take time. Most countries in Southeast Asia have large populations and, in some cases, face additional logistical challenges such as safe delivery to numerous outlying islands or remote areas using basic infrastructure. Like elsewhere in the world, individual hesitancy to vaccination could also slow coverage rates. A recent government survey found over a third of Indonesians are unsure about or would outright refuse receiving a shot. [2]

At the same time, evidence suggests urban centers account for most of the spread and rollout here could happen more quickly than at the national level. [3] An Indonesian government official recently suggested that a million vaccine shots per day are "manageable" in more populated areas. Such a pace would allow the country to achieve two-thirds coverage by mid-2022.

Uncertainties abound. Many observers rightly focus on downside risks, including availability of global supplies, new variants of virus, and logistical logjams. But there are also upside risks, especially if it's easier to get herd immunity than projected; if seroprevalence is already prevalent (in other words, many people have already contracted the virus and so are immune); or if high coverage in densely populated urban centers has an outsized effect on spread.

Southeast Asia About Halfway Out Of The COVID Hole…

Coming into 2021, activity in Southeast Asia's big four emerging markets was between 2% and 8% below pre-pandemic levels (we measure this with real seasonally adjusted GDP). Bear in mind that these economies usually grow quickly so this implies very large gaps between where these economies were and where they would have been in the absence of COVID.

The good news, though, is that these economies are either half-way out, or better, from a very deep hole. At the trough during the second quarter of last year, output compared to pre-pandemic levels fell by about 8% in Indonesia, 12% in Thailand, and approaching 20% in Malaysia and the Philippines.

Chart 2


…But Recovery May Be Delayed

In our view, the biggest threat to timely economic recovery is individual consumer behavior, as people stay home more and spend less. Household spending is key for growth in these economies. For example, household consumption accounts for almost 60% of GDP in Indonesia and Malaysia, compared to less than 40% in China.

But what is meant by recovery? We define it as quarter-on-quarter growth that is above trend. In other words, growth high enough to bring us closer to the point when all the economy's resources--workers and capital--are once again fully employed.

For typically fast-growing economies, even a small delay can amplify output gaps.

Chart 3 shows an illustrative recovery path which factors in two changes from our November forecasts: (I) a weaker-than-expected first quarter due to the pandemic; and (ii) a two-month delay in the onset of recovery (above-trend growth). In our delayed recovery scenario, growth gets back above trend only in the fourth quarter and output reaches pre-COVID levels around October, a delay of two months. The gap between the two lines shows economic activity (and income) which is lost and never recovered.

Chart 3


A Weak Q1 Could Shave About 1 Percentage Point Off 2021

A two-month delay in the recovery could cut our 2021 growth forecasts to 5.2%, from our current 6.2% baseline (see table 1). About two-thirds of this decline would likely come from weaker-than-expected activity in the first quarter, which would have carry-over effects into the second half. It would also mean higher growth rates in 2022, off a lower base.

Table 1 shows scenarios based on simple timing assumptions. Each two-month delay pushes out the point at which growth picks up from its current pace and rises above trend. In a six-month delay scenario we factor in more economic scarring caused by a prolonged recession, which causes a greater amount of permanent economic damage.

Table 1

Slower Recovery In Sequential Growth Would Steepen Permanent Losses
Scenario analysis for delays of two to six months, by country
Current baseline (%) Two-month delay (%) Four-month delay (%) Six-month delay (%)
Indonesia 2021 growth 5.4 4.7 4.5 3.8
2022 growth 5.2 5.4 5.2 5.2
Permanent loss 6.1 6.5 6.9 7.7
Output returns to pre-covid level 21-Apr 21-Jun 21-Jun 21-Jul
Malaysia 2021 growth 7.5 6.5 6.2 5.7
2022 growth 5.2 5.5 5.3 5.1
Permanent loss 6.7 7.5 7.9 8.6
Output returns to pre-covid level 21-Jul 21-Sep 21-Oct 21-Dec
Philippines 2021 growth 9.6 7.7 7.4 7.1
2022 growth 7.6 8.2 8.0 8.1
Permanent loss 10.7 11.7 12.0 12.6
Output returns to pre-covid level 21-Dec 22-Mar 22-Apr 22-May
Thailand 2021 growth 5.0 4.0 3.6 3.2
2022 growth 3.9 4.3 4.3 4.1
Permanent loss 8.9 9.6 10.0 10.8
Output returns to pre-covid level 21-Aug 21-Dec 22-Mar 22-Jun
Southeast Asia 2021 growth 6.2 5.2 5.0 4.4
2022 growth 5.3 5.6 5.4 5.4
Permanent loss 7.4 8.1 8.5 9.2
Output returns to pre-covid level 21-Aug 21-Oct 21-Oct 21-Nov
Note: To compute the scenario outcomes, we delay the peak sequential growth rate in 2021 in our base case by two, four, and six months respectively. For example, if peak sequential growth rate begins in July in the baseline, the scenario would extend below-trend growth for two months before a pick up in sequential growth two / four / six months later. Source: S&P Global Ratings.

For Indonesia, Southeast Asia's largest emerging market, growth would slow to 4.7% for 2021, below the 5% trend rate of recent years. This would mask a year of two halves, with the pace of growth in the second half accelerating by more than 5%.

Delay Means More Permanent Damage

The longer an economy is stuck with unemployed resources, the larger the damage to balance sheets and workers. More businesses would close, and more workers would lose jobs, skills, and motivation. Together, this would hold back the level of activity once the economy reaches its new normal. We call the gap between our estimate of the achievable new normal and the pre-COVID trend as "permanent damage".

In our current forecast, we estimate the permanent loss at about 7.4%. This would rise to 8.1% in a scenario with a two-month delay in the recovery timeline. The Philippines and Thailand would likely see the largest permanent losses at about 12% and 10%, respectively. The Philippines suffered from a deep contraction in 2020 amid exceptionally tight mobility restrictions. For Thailand, the issue is structural and related to the tourism sector which S&P Global Ratings expects to be one of the last industries to recover from COVID (see "COVID-19 Heat Map: Some Bright Spots In Recovery Amid Signs Of Stability," published on RatingsDirect on Feb. 18, 2021).

Not All Bad News--External Picture Still Brightening

Aside from the direct effects of the pandemic, some other risks are tilting to the upside. Most important, external demand may boost growth more than expected this year, especially if the U.S. adds more stimulus soon. China's recovery may also rebalance faster than expected, lifting consumer spending and imports, including from the rest of Asia.

External demand is already supporting activity. Net goods exports contributed about 1.1 percentage points to quarter-on-quarter growth in late 2020, or about 17% of total growth, compared with a five-year average contribution of 0% of growth. This does not consider the indirect effects of external demand, including on investment and consumption by workers in related industries.

The EMs of Southeast Asia cannot rely on external demand alone to drive a pick-up to above-trend growth later this year. Still, these tailwinds could add momentum to a domestic recovery built on light at the end of the pandemic tunnel.

A Note On Our Global Coronavirus Coverage

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.


(1) Status of COVID-19 vaccines within World Health Organization evaluation process. (

(2) Indonesian Technical Advisory Group on Immunisation (ITAGI).

(3) Sahasranaman Anand and Jensen Henrik Jeldtoft, 2021, "Spread of COVID-19 in urban neighbourhoods and slums of the developing world," Journal of the Royal Society.

Related Research

This report does not constitute a rating action.

Asia-Pacific Economist:Vishrut Rana, Singapore + 65 6216 1008;
Asia-Pacific Chief Economist:Shaun Roache, Singapore (65) 6597-6137;

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