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Coronavirus’ economic impact in East and Southeast Asia

The ASEAN+3 Macroeconomic Research Office (AMRO) estimates that the COVID-19 epidemic could deduct as much as half a percentage point from the economic growth of some regional economies in 2020.

East Asia Forum

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As the number of coronavirus cases continues to rise around the world, there are deep concerns over the potential economic impact of the virus.

The virus originated in China, and given the size of China’s economy, a slowdown there from the COVID-19 outbreak will spill over to the rest of the ASEAN+3 region.

The ASEAN+3 Macroeconomic Research Office (AMRO) estimates that the COVID-19 epidemic could deduct as much as half a percentage point from the economic growth of some regional economies in 2020.

Outside of China, the impact is also being felt in the rest of the ASEAN+3 economic bloc, which comprises the 10 member states of the Association of Southeast Asian Nations as well as China, Japan and South Korea — through three main channels.

Disruption to travel, tourism and related industries

The most immediate impact on the region has been the disruption to travel, tourism and related industries. Flight suspensions, travel advisories, restrictions and bans on visitors from China, China’s order to stop outbound travel groups and a more cautious approach to travel owing to fear of contagion have all led to a sharp drop in tourism in the region — both Chinese tourists as well as those from other countries.

During the SARS outbreak in 2002–2003, tourism from China to countries such as Japan, South Korea, Malaysia, Singapore and the Philippines dropped by as much as 50 to 90 per cent before rebounding fully the following year.

But regional economies have become much more dependent on Chinese tourism since then. Today, visitors from China make up around 40 per cent of all tourist arrivals in the region — up from less than 20 per cent before SARS.

Even a relatively short-lived embargo on Chinese travel will have a much bigger impact this time around, even if the subsequent rebound is strong enough to offset the initial pull-back.

Tourism’s contribution to economies of the region has increased

Tourism’s contribution to economies of the region has increased almost everywhere since the early 2000s. In 2018, the tourism industry is estimated to have contributed more than 30 per cent of Cambodia’s GDP, and more than 20 per cent for Thailand and the Philippines. A drop in visitor arrivals from China and other countries is damaging for the ASEAN+3 region, especially for those countries with large tourism sectors and high volumes of Chinese visitors.

The epidemic is also affecting trade within the ASEAN+3 region

The manufacturing sector has been disrupted and domestic demand in surrounding countries is taking a hit.

Many regional economies, such as Singapore and Vietnam, are deeply integrated within regional and global supply chains and China is an important link in these networks. Notably, trade between China and the ASEAN region has grown strongly over the last two decades, so any disruption in China will impact regional trade and production. Still, these disruptions are expected to be transitory — trade is expected to rebound in line with China’s demand for intermediate and final goods once the epidemic recedes.

Many countries in the ASEAN+3 region have a rapidly growing number of confirmed cases of COVID-19. The spread of the virus will affect these economies directly via impact on the healthcare sector, as well as indirectly through measures implemented to contain the outbreak, such as quarantines or travel restrictions.

It also impacts business and consumer confidence, and triggers a change in public behaviour to avoid contagion. Just as in China, it will hurt economic activity across the region — though likely to a lesser degree — as a result of disruptions to domestic production and investment and reduced spending on goods and services.

If the Chinese economy slows down more than expected, or if the epidemic lasts longer and becomes more contagious than current estimates suggest, the impact on regional economies will be more severe.

That said, the ASEAN+3 economies still have policy space to mitigate the impact and shore up growth. China has already implemented measures to support its economy, including providing financial support to affected sectors. Other countries are likely to follow suit.

Skilful use of various policy levers by regional policymakers is more important than ever, given that uncertainty about the epidemic is high and the risk of continuing contagion and a global economic slowdown is rising.

Author: Anne Oeking, AMRO. Source : East Asia Forum

Anne Oeking is an economist at the ASEAN+3 Macroeconomic Research Office (AMRO), Singapore.

East Asia Forum provides a platform for the best in East Asian analysis, research and policy comment on the Asia Pacific region and world affairs.

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Asean

Assessing the economic impacts of COVID-19 on ASEAN countries

All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent.

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Author: Jayant Menon, ISEAS–Yusof Ishak Institute

The COVID-19 pandemic is first and foremost a human tragedy. Measures introduced to deal with the pandemic could save lives but are having wide-ranging economic effects and inducing economic contagion.

There are already studies estimating the economic impact of the virus. But greater focus is needed on the transmission mechanisms of the economic contagion and in critiquing how assessments of the economic impacts are made, concentrating on the ASEAN region.

The effects of COVID-19 are hitting ASEAN economies at a time when other risk factors, such as a global growth slowdown, were already rising.

COVID-19 is disrupting tourism and travel, supply chains and labour supply

Uncertainty is driving negative sentiment. This all affects trade, investment and output, which in turn affects growth. Tourism and business travel, as well as related industries, especially airlines and hotels, were the first to be affected. And the conditions are worsening as more countries go into shutdown.

The supply disruptions emanating mostly from China will reverberate throughout the value chain and disrupt production. Since China is the regional hub and accounts for 12 per cent 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 labour supply could also be high 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 lead to sharp declines in domestic demand. And their impact on economic growth will further propagate these disruptions. This compounding effect can magnify and extend short-run 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, there will be sharp increases in unemployment and poverty. Some degree of decoupling from China, or de-globalisation in general, may also be a permanent reminder of this pandemic.

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 produced within them. Indonesia and the Philippines have been increasing supply chain engagement and will also not be immune.

Vietnam is the only new ASEAN member integrated into supply chains with China and is already suffering severe supply disruptions.

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.

Thailand is probably the most tourism dependent Asean country

All ASEAN countries are dependent 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 countries have large overseas foreign worker populations and restrictions on their movement or employment prospects as COVID-19 spreads will affect 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. A model-based analysis, rather than casual empiricism, is required to reduce the problem.

Even before the outbreak, 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 disruption to supply chains.

Any assessment of impacts must recognise that the spread of COVID-19 is unpredictable, and so too the response by governments. It is difficult to estimate the impacts of a shock that is uncertain in itself. This reiterates the need for rigorous modelling and scenario analyses. The current trend points to risks rising, often accelerating, as with previous epidemics. This uncertainty underscores the need for caution in assessing, and regular recalibration in producing assessments.

Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS–Yusof Ishak Institute, Singapore.

A version of this article first appeared in ISEAS Commentary.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.

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