Contribution Korea is at the vanguard of Asia's reopening as focus shifts toward monetary policy normalization

Vishrut Rana, Asia-Pacific economist at S&P Global Ratings / Courtesy of S&P Global Ratings

By Lee Kyung-min

• Published Sep 29, 2021 8:37 AM KST
• Updated Sep 29, 2021 4:55 PM KST

Asia-Pacific Sets Off On the Winding Path to Economic Reopening

By Vishrut Rana

The Asia-Pacific region had notable success in containing initial waves of COVID-19 last year, which enabled some normalization of activity even as international borders remained closed. However, COVID-19 variants have evaded mitigation measures over the past several months leading to fresh pandemic waves that have had more impact on healthcare systems than those seen last year. These have led to fresh intermittent lockdowns and mitigation measures to contain the spread of the pandemic that had dampened economic activity.

But the nature of these mitigation efforts has varied considerably in timing and intensity across the region. More stringent and higher intensity lockdowns may have a higher likelihood of containing new cases but are also more costly for the economy. In addition, the path to normalization is likely more uneven due to the chances of intermittent lockdowns, which delay economic reopening. On the other hand, lighter intensity policy responses would be more aligned with quicker economic normalization and “living with COVID-19” or endemic COVID-19 scenarios.

The Asia-Pacific region's vaccination coverage has improved significantly, which is enabling gradual reopening. The region was slow to rollout vaccination drives in the first half of 2021 and this required stringent policy responses to new COVID-19 waves. Fresh pandemic waves increased the urgency of vaccination rollouts, and now several Asia-Pacific economies have caught up with the U.S. and Europe in coverage. Some emerging markets still have slower vaccination drives, however even these regions could have broad urban vaccination coverage over the next year.

Armed with improved vaccination cover and greater experience in handling pandemic waves, the region has now set off on the path to economic normalization. A region's “response intensity,” or its willingness to tolerate fresh COVID-19 outbreaks can evolve quickly over time according to the capacities of individual health systems and the preferences of the public and policymakers. More jurisdictions are now lowering their response intensities as greater vaccination coverage is lowering pressure on healthcare systems and giving more confidence to the public and policymakers to increase normalization.

Korea is at the vanguard of Asia's reopening. Policymakers are focusing attention on living more normally with COVID-19, and responses have favored targeted lockdowns, and current mobility levels are comparable with pre-pandemic levels according to data from Google Community Mobility Reports. Following a gradual start to vaccination amid limited global supplies, the country has now quickly expanded coverage. A total of 45 percent of the population is fully vaccinated and 74 percent of the population has had at least one dose.

Malaysia and Thailand have recently announced easing lockdown measures even as new case numbers remain relatively high. The easier lockdown measures have not escalated the pandemic, as new COVID-19 case numbers continue to decline. Singapore has responded with lighter mitigation to a new pandemic wave, and authorities in Australia have signaled that response intensities could lighten once widespread vaccination coverage is achieved.

The starting points for the region's response intensity vary widely. We quantified these variations over the period between July and early September. We looked at mobility patterns, and plotted these against average daily new COVID case numbers. We deemed those jurisdictions that did not heavily restrain mobility in response to fresh pandemic waves as having a "light intensity,” while those that shut down mobility on the scantest signs of new outbreaks were labelled "high intensity.” Taiwan, Vietnam, and New Zealand have the highest response intensities according to this measure, while Korea, Japan, Indonesia and Thailand have relatively lighter mobility reductions in response to outbreaks (see chart 8). Mobility data is unavailable for China, but the zero-COVID strategy there would fall under the high intensity grouping.

As economies gradually reopen worldwide, attention is now shifting toward gradual monetary policy normalization. Durable goods demand has been the key global growth driver, but economic activity will now recover more broadly as travel and other restrictions on services are relaxed. Consumers are likely to increase spending on services over the recovery phase. Currently global monetary policy is exceptionally accommodative, and this together with ongoing pockets of supply constraints and an improvement in consumer demand may cause an increase in inflation.

The Bank of Korea was the first major central bank in Asia to tighten policy at its August meeting. The central bank remains wary of risks from financial imbalances and particularly high housing prices. Globally, several emerging markets and some higher-income central banks are leading the withdrawal of monetary stimulus. Some of the central banks that have hiked policy this year include Brazil, Chile, Russia, Turkey and Norway. The pace of quantitative easing tapering in the U.S. will influence the speed policy tightening in Asia.

As Asia gradually moves down the reopening path and economic activity recovers, adapting policy responses will be key to sustainable normalization. Response intensities for managing COVID-19 will depend on healthcare system capacities and tighter measures may be needed from time to time. New virus variants remain a key risk that could hinder recovery. As healthcare options against the virus improve, focus will increasingly shift to building up economic and social buffers for the next challenge that we face as a connected society.

The writer is Asia-Pacific economist at S&P Global Ratings