Value context and insight. lkm@koreatimes.co.kr
Contribution Asia's outlook for 2021 looks rosy but with important downward risks
Alicia Garcia Herrero
By Lee Kyung-min
By Alicia Garcia Herrero
Asian economies have been hit by the pandemic but differences among countries are striking. Beyond the extent of lockdowns and the size of the policy response, whether fiscal or monetary, the underlying characteristics of Asian economies also explain differences in growth trends. Countries with the largest current account deficits have suffered as risk-off episodes have complicated their necessary external funding, constraining their fiscal support. This is the case of India, Indonesia and the Philippines.
In turn, Mainland China, but also Vietnam and Taiwan and, to a lesser extent, South Korea and Japan have been less impacted both because of more effective containment policies and, in many cases, larger fiscal and monetary response. In addition, many of these economies' sectoral specializations have helped increase exports during Covid-19, whether tech, electronic and medical supplies. This is clearly the case of the Mainland but also South Korea and Taiwan.
Regarding policy response, the region has shown much more courage as opposed to previous crises even in emerging Asia. This is more the case on the monetary front than on the fiscal front - with the clear exception of Japan and Singapore. The introduction of full-fledged quantitative easing in some more geographies, such as Australia, and even in some emerging countries such as Indonesia, India and the Philippines are welcome. Looking forward, most countries in the region would do well to improve on the efficiency of fiscal policy for countercyclical purposes.
The good news is that aggressive easing in developed markets has driven rates and the US$ lower, helping with risk appetite. In addition the recent roll-out of new vaccines cannot but make 2021 a good growth year, which the markets have already priced in. This also mean that some temporary reversal cannot be discounted but, overall, 2021 will come with much better but most of it will be cyclical with 2022 will be a much harder year. As far as the sectoral composition of the 2021 recovery is concerned, the rotation away from Covid-19 sectors into the real economy will help old sectors, especially transportation and energy, as well as countries most dependent on them.
In addition, some countries have managed to carry out reforms during the pandemic, out of necessity, especially in India, Indonesia and the Philippines. Overall, with growth staging a comeback and companies resuming investment after a massive drop in 2020, our outlook remains positive but not without acknowledging the hangover of the pandemic. In fact, faster debt accumulation is an important negative consequence of Covid and the policy response, not only in Asia but globally. The second negative consequence is an acceleration of demographic problems due to the fall in the fertility rate across the globe. In Asia, this hits aging economies much more brutally than those with a still positive demographic dividend. On the positive side, there is a silver-lining to Covid, namely a potential boost to regional trade integration thanks to RCEP.
As for South Korea, thanks to successful containment strategy, the country will escape 2020 amongst the most unscathed in the region with GDP falling only 0.8% in the first three quarters of the year stemming primarily from the decline of household consumption while investment held up. The peninsula never had lock-downs even though it had an outbreak which led to less reduction to domestic mobility. Still, containment measures, with occasional tightening took a toll on retail sales and consumption. Korea bright stars also shone during Covid-19 as electronic, medical products and tech did well. The 13.8% of GDP fiscal stimulus helped offset the decline of private consumption. Meanwhile the BOK cut rates by 75bps to 0.5% and adopted unlimited amount of liquidity for repo purchase facility for three months and expand access as well as eligible securities.
In addition, although not directly under the BOK, the government “fiscal” had funds to purchase stocks and bonds to shore up financial markets as well as banned short selling. These measures, coupled with Korean stocks' high exposure to winners of Covid-19 have spurred capital inflows as well as domestic buying. Meanwhile, unemployment and household debt rose, widening divergence in the economy. For 2021, South Korea should expand by 2.1% in 2021 on the revival of household consumption. The USD512bn fiscal budget suggests that help will come from Master Keynes in 2021.
Moving to the risks for the region and South Korea, in particular, the first and most obvious one relates to vaccine-related delays which could come from production or distribution bottlenecks but also renewed lockdowns. At the other end of the spectrum, an inflationary shock could appear due to supply constraints on the back of pent-up demand from a smooth vaccine rollout and widespread optimism. Supply constraints would obviously hit economies with current account deficits more severely. The third one comes from growing tensions between the US and Mainland China, especially as they move further from economics to security issues. Taiwan and the South China Sea are clearly the most important flashpoints.
Finally, such complicated geopolitical outlook, coupled with the lessons learned from Covid regarding supply disruptions could push the reshuffling of value chains further, with important consequences for Asia. The risk of decoupling, or even deglobalization if more generalized, could actually extent beyond trade towards technology or even finance, with obvious negative consequences for growth in Asia and globally. Still, South Korea high household debt is key, as well as the long-standing tensions with North Korea. Finally, harsh competition from the Mainland and gloomy prospects for exports to China in the light of its increasing self-reliance and technological upgrade is obviously an important challenge.
Alicia Garcia Herrero is the chief economist for Asia Pacific at NATIXIS and a senior research fellow at BRUEGEL.