ASEAN economies hard hit by Covid-19, exacerbating earlier problems

06:00 | 09/05/2020 Vietnam - Asean

(VEN) - The Covid-19 pandemic is heavily affecting ASEAN economies, slowing growth, interrupting travel and tourism and disrupting supply chains and labor supply.  

asean economies hard hit by covid 19 exacerbating earlier problems

Tourism and travel business, as well as related industries, especially airlines and hotels, were the first to be affected, and their plight is deteriorating as more countries go into shutdown. The supply disruptions emanating mostly from China will reverberate throughout the value chain and undermine production. Since China is a regional hub and accounts for 12 percent of global trade in parts and components, the cost of the disruption in the short run will be high.

The negative effects of quarantine arrangements on labor supply could also be significant depending on duration and sector. Manufacturing has been hit harder than service industries, where telecommuting and other technological aids limit the fall in productivity. All these disruptions will likely lead to sharp declines in domestic demand and their impact on economic growth will further increase these disruptions.

This compounding effect could magnify and extend short-term effects into the long run. The highest economic cost could come from the intangibles. The effects of negative sentiment about growth and general uncertainty, which is already affecting financial markets, will feed into reduced investment, consumption and growth in the long run. Rolling recessions around the world now appear inevitable, despite the stimulus measures being contemplated. If so, sharp increases in unemployment and poverty can be expected.

Supply chain shift to ASEAN states

Among ASEAN countries, Singapore, Malaysia and Thailand are heavily integrated in regional supply chains and will be the most affected by a reduction in demand for the goods they produce.

Indonesia and the Philippines have been increasing supply chain engagement and will also not be immune. Given time, supply-side adjustments will alter trade and investment patterns. The main adjustment will involve relocating certain activities along the supply chain from China to ASEAN countries. Although the pandemic will disrupt the relocation phase, ASEAN countries can benefit from the new investments, mitigating overall negative impacts.

All ASEAN countries rely on tourism flows but Thailand is probably the most dependent. Cambodia and Laos receive most of their investment and aid from China, and a marked growth slowdown in China will affect them the most.

The Philippines and Mekong River countries have large overseas foreign worker populations and restrictions on their movement or employment prospects as Covid-19 spreads will affect labor sending and receiving countries. Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will hit them hard. Others will benefit from lower oil prices, as will the struggling transport sector.

In measuring the impacts of Covid-19, it is important to separate its marginal impact from observed outcomes. This is important because the remedy may vary depending on the cause of the disruption. This requires an analytical framework that can measure deviations from a baseline scenario that incorporates pre-existing trends.

Not all troubles stem from Covid-19

asean economies hard hit by covid 19 exacerbating earlier problems

Even before the outbreak of the pandemic, risks of a global growth slowdown were rising. The restructuring of regional supply chains had started, driven initially by rising wages in China and accelerated by the US-China trade war. While Covid-19 may further hasten the pace and extent of the restructuring, it is only partly responsible for what may happen. It would be misleading to attribute all of the current disruption to Covid-19. Had the trade war not preceded it, Covid-19 may have resulted in greater disruptions to supply chains. Any assessment of impacts must recognize that the spread of Covid-19 is unpredictable, complicating the response by governments. Moreover, due to the complexity and mutual dependence in supply chains, developing economies like ASEAN countries with a high level of trade openness are the most vulnerable to the shock from China.

From the trade war to Covid-19, one can see ASEAN countries’ heavy dependence on intermediate goods from China. Among the 10 Asian economies that are said to be vulnerable to the disruption of supplies from China, including six ASEAN economies (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam), Thailand is said to suffer heavy impacts with important goods from China accounting for 11 percent of total import value. Indonesia is said to be less vulnerable with important goods from China accounting for eight percent of total import value and comprising mostly fully assembled products. For the Philippines, the ratio is seven percent.

Steel is among the important goods from China. Interruptions in steel supplies from China could affect infrastructure projects in the Philippines. Malaysia and Singapore seem to face the lowest risks with important goods from China respectively accounting for 3.5 percent and 2.6 percent of their import value.

Viet Dung