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Edition 8 November 2020
Voice of Asia
Our Voice of Asia series brings to life the challenges and
opportunities facing the region today and tomorrow.
Voice of Asia is the result of significant collaboration across
the Deloitte Asia Pacific and Global Network.
Cover and chapter images: Subramanian, Athappan
Edition 8 November 2020
Contents
Three Themes Driving the Outlook: Rehabilitation,
rectification, and reforms | 2
The Next Wave: Emerging digital life in South
and Southeast Asia | 27
Acknowledgements | 39
1
Three Themes Driving the Outlook: Rehabilitation, rectification, and reforms
Edition 8 November 2020
Introduction
T
HE year 2020 will undoubtedly linger long Second, we are likely to see a process of rectifica-
in our collective memories as an annus hor- tion across the region. Some economies outper-
ribilis of extraordinary proportions. But all formed others during this crisis, a testament to
bad things eventually pass and so will COVID-19. their better fundamentals. The crisis cast a harsh
As we move into 2021, the Asia-Pacific region can light on those countries which had neglected get-
look forward to a better year as the pandemic ting important basics right. Now, there is a great-
is brought under control and economic activity er sense of urgency to address weaknesses that
gradually revives. reduced countries’ capacity to absorb and bounce
back as fast as possible from unexpected shocks
We believe three forces will help to shape the re- like the pandemic.
gional economic landscape in the coming year:
Third, several countries in the region are also like-
First, economies will undergo a period of reha- ly to introduce additional fundamental reforms,
bilitation as governments use every policy tool directed at producing a new model for economic
available to get their economies back on track and management and development, so as to adapt to
corporations make the repairs needed to resume the substantial changes that the post-pandemic
normal operations. world will bring.
3
Voice of Asia
Rehabilitation — the
return to a more normal
economic track
Key assumptions for the these areas, we sense policymakers are try-
global environment that ing to find ways to resume normal business:
Travel bubbles are being created between
the Asia-Pacific will face countries that have more successfully con-
In thinking about the economic trajectory in 2021, tained the pandemic, thus allowing some de-
there are many areas of uncertainty that require gree of recovery in air travel, hotels and other
us to make some assumptions: tourism-related industries.
• We assume that improved clinical manage- • These assumptions lead us to believe that the
ment of COVID-19 and the availability of global economy will have returned to its pre-
more effective medications will mitigate the pandemic level of output by the end of 2021:
health-related risks of the pandemic. Thus, The developed economies such as the United
even before a vaccine is developed and widely States, Europe, and Japan, are likely to be
distributed, the threat posed by the virus will modestly below that level and emerging econ-
diminish. By 2021, hospital capacity should omies led by China, South Korea, and Taiwan,
increase, as governments implement proto- slightly above it. Australia should also have
cols for testing, isolating and monitoring po- returned to pre-pandemic output levels by the
tentially infected people. If these assumptions end of 2021, with New Zealand would lagging
hold, then the economic dangers posed by behind by a few months.
further waves of infection can be contained:
There should be fewer alarming surges in in- • Even with travel bubbles and the like, some
fections, placing healthcare systems in a better sectors of economic activity such as travel
position to handle new waves of infection. and tourism, plus affiliated activities, will take
years to return to their pre-pandemic levels
• Consequently, we believe all this will help gen- of output. Nevertheless, other sectors will
erate more confidence among policymakers to see better opportunities to expand materially
cut back on restrictions, among consumers to beyond their pre-pandemic levels, helping to
resume more of their normal activities, and offset that damage. These should include in-
among businesses to overcome their hesita- frastructure spending, investment in IT goods
tion to hire, invest in new technology and in- and services, and spending on healthcare sys-
crease capacity. Of course, some sectors could tems, pharmaceuticals, and equipment. In-
take longer to recover — travel and tourism creased super-power competition should also
related activities, for instance, as well as ac- lead to more money being directed to research
tivities that bring large numbers of people to- and development, and we also expect stepped-
gether in close proximity such as sports events, up defence spending.
conventions and the like. However, even in
4
Edition 8 November 2020
• While world trade growth was undermined by other regulatory forbearance will, we believe,
increased protectionism, the US-China trade be extended where possible. This is already
war in particular, we assume there will not be happening, for example, in Malaysia. Govern-
a material hardening of protectionism. We of- ment guarantees on loans or other forms of
fer an expanded analysis of the impact of the risk sharing will also continue in places such
recently concluded American presidential as Singapore, so policy support should not be
and congressional elections in a separate sec- withdrawn so precipitously as to destabilize
tion below. The basic assumption is that big the economic recovery.
powers such as the US and China will avoid
a descent into greater protectionism, though Given this policy emphasis on rehabilitation, sev-
technological bifurcation remains a risk. eral other factors will determine economic out-
comes in the region:
Expect continued and First, is the capacity of the state in two key areas.
expansive policy support
• One is the management of the pandemic. In
to reduce downside risks some countries, such as China, the capacity
With the above in mind, we believe that the key to test, isolate and treat patients on a massive
element of rehabilitation will be policy efforts to scale is impressive, as is the ability to plan and
spur the regional economies to return to a normal enforce calibrated lockdowns. In other econo-
growth trajectory. In general, our view is that: mies such as Australia, New Zealand, Hong
Kong, South Korea, Taiwan, and Singapore,
• Monetary policies will remain highly support- the quality of the healthcare system enables a
ive of economic activity, with scope for more very low fatality rate, while people have gener-
rate cuts in some countries such as India and ally been cooperative in efforts to contain the
Indonesia. In some jurisdictions, rate cuts pandemic. The speed of economic recovery
might not be employed but there will be a will correspond with healthcare capacity and
greater willingness to experiment with uncon- the cooperation of the community.
ventional policies such as yield curve control
and forward guidance. The monetary authori- • The other is in the policy arena. Territories
ties in South Korea and Thailand have shown that have greater fiscal and monetary space
a willingness to contemplate unconventional will eclipse others, since they can continue
policies, including targeted approaches to to extend substantial support to the economy
help borrowers and avoid a liquidity crunch. without being severely constrained by issues
of debt sustainability or financial markets’ lack
• Fiscal support was extraordinarily large dur- of confidence in central bank management.
ing the recent crisis, so it is not a surprise that This group should include Australia, New Zea-
the level of fiscal support is being reduced as land, China, South Korea, Taiwan, Hong Kong,
governments in the region remain wary of the and Singapore. In some countries where fis-
longer term risks of raising public sector debt cal space does exist — such as Thailand — the
levels. However, governments are aware of capacity of the state to effectively implement
the dangers of premature withdrawal of fiscal projects and disburse payments is wanting.
support. As the recent Malaysian budget for
2021 suggests governments will maintain ex- The second determinant of the outlook is the de-
pansionary fiscal conditions. gree of dependence on domestic demand rather
than external demand, which will rebound, but
• Policymakers are also likely to use other fairly slowly. China, India, and Indonesia have
means to mitigate downside risks. For ex- large engines of domestic demand that they can
ample, moratoria on loan repayments and turn to if external demand remains patchy.
5
Voice of Asia
Third, where countries have to rely on external efforts — such as incentives provided by the
factors, which of them can leverage the more pos- Japanese and Taiwanese governments to relo-
itive trends in the global economy? cating firms — will also speed up this reloca-
tion. We see Vietnam continuing to be a major
• The technology cycle: We remain upbeat beneficiary. However, Malaysia and Thailand
on technology as a driver of export demand are also benefitting, and recent reforms in In-
throughout the region. There might be some dia and Indonesia could also bring some relo-
near-term deceleration in tech demand due to cation to those countries.
transient inventory dynamics. However, the
underlying structural story is positive. There • As foreign direct investment recovers from
are many next-generation technologies on the its sharp plunge this year, we expect a degree
cusp of taking off. These include artificial in- of recovery in 2021. The major winners from
telligence and machine learning, plus all their that, we suspect, will be the larger economies
many applications. That will mean increased that offer large, scalable markets, such as
silicon content per device. Asian economies China, India, and Indonesia, as well as those
that are highly specialized in tech production whose reforms (see below) offer a compel-
i.e. South Korea, Taiwan, Singapore, Malaysia, ling story of improved returns and greater
and the Philippines, will be major beneficiaries. business opportunities.
• Reconfiguration of supply chains: The reloca-
tion of production out of China to lower-cost The end result will be a
destinations began some time ago as China fairly good year in 2021
moved up the value chain and costs rose.
However, growing American protectionism We see economic growth gathering momentum,
directed at China, and the prospects of tech- price pressures remaining largely benign, exter-
nological bifurcation as the US and China nal imbalances at muted levels, and currencies
pursue their own technological paths separate largely steady, as shown in Table 1:
from each other, will add to the incentive for
producers to leave China. Active government
6
Edition 8 November 2020
Table 1
Summary of Economic Forecasts for 2021
Economy GDP growth Inflation Current Currency (vs Benchmark
(%) (%) Account USD, end-year) Policy rate
(% of GDP) (% end year)
Australia 3.10 1.40 -0.20 0.73 0.25
China 7.50 3.00 0.50 6.95 2.00
Hong Kong 3.00 1.40 10.50 7.75 NA
India 10.00 5.40 0.20 73.10 3.70
Indonesia 5.60 2.40 -1.80 14,100.00 3.25
Japan 1.90 0.30 3.20 103.00 -0.10
South
3.00 2.20 4.00 1,125.00 0.50
Korea
Malaysia 6.70 1.60 1.80 4.00 1.75
New
3.80 0.80 -3.60 0.68 -0.50
Zealand
Philippines 7.00 2.60 0.50 50.50 1.75
Singapore 5.50 0.60 16.50 1.34 NA
Taiwan 3.50 0.70 12.00 28.50 1.125
Thailand 5.50 3.40 5.30 30.50 0.50
Vietnam 7.90 3.50 9.90 23,010.00 4.00
Source: Forecasts prepared by Deloitte Asia and Centennial Asia Advisors
7
Voice of Asia
Rectification — building
resilience against
future shocks
A
S explained above, the pandemic ex- Thailand, and Malaysia where central banks will
posed weaknesses that need to be recti- renew efforts to contain its growth once the crisis
fied in the countries of the region. We is over.
expect responses in several areas to address the
following gaps: A third area is infrastructure spending: Econo-
mies such as India, Indonesia, and the Philip-
The first priority will be healthcare systems, which pines raised their spending on infrastructure as a
need improvement in several areas: share of economic output. Sadly their efforts were
set back as a result of the disruptions brought
• The supply of critical equipment for pandemic about by the pandemic. For example, in Indone-
control, including equipment for intensive sia, planning was delayed for the relocation of the
care such as ventilators, personal protective country’s capital from Jakarta in Java to a loca-
equipment for medical staff, and testing kits. tion in central Kalimantan. Several large projects
such as the Jakarta-Bandung high speed railway
• The adequacy of trained medical personnel have slowed. In Thailand, the disbursement rate
including doctors, nurses and others who can for budgeted spending on infrastructure fell to
quickly deploy to evolving situations. Several just 37% in 2020, partly as a result of the dis-
countries in the region fall short of the recom- ruptions caused by COVID-19. As the pandemic
mendation of the World Health Organization comes under control and economic growth re-
for a doctor-patient ratio of 1:1,000, and need sumes, governments across the region will step
to close this gap. up infrastructure spending.
• Easily accessible medical facilities, especially Finally, governments have been trying to improve
in rural areas. business ecosystems to encourage domestic and
foreign investors to increase investment. India
The management of debt in each territory is and Indonesia have made considerable progress
another area where improvements are needed in moving up in the World Bank’s ease of doing
to boost resilience. China has realized this and business rankings. However, progress has stalled
reined in the growth of debt in the corporate sec- over the last couple of years.
tor. Consumer debt remains high in South Korea,
8Edition 8 November 2020
Reforms — creating game
changers to progress to
new development models
A
PART from the pandemic, policymakers India has also started to make a bigger effort to
in Asia-Pacific have had to contend with implement needed reforms. In recent months, it
a series of challenges to their economic has passed potentially game-changing reforms
development models. The pace of globalization that should accelerate the modernization of In-
has slowed with the rise of protectionism and US- dian agriculture. It has also begun reforming its
China trade tensions. New technologies are dis- archaic labour market regulations.
rupting whole industries and some may alter the
value of competitive advantages that developing Indonesia recently passed an Omnibus Bill in a
economies enjoy, such as cheap unskilled labour. piece of grand legislative reform of regulations
Recent extreme weather events have concentrat- covering a great many sectors. The most trans-
ed minds on the risks posed by climate change. formative is in the labour market, where onerous
impositions on companies have been reduced
Several countries in the region are responding to without compromising worker protection. In par-
this. ticular, the burden of compensation for retrench-
ments — a major bugbear for foreign investors —
China has probably been the economy with the was reduced. But the Bill went further, addressing
most comprehensive response. The recent meet- other areas of weakness in the investment envi-
ing of the Chinese Communist Party’s Central ronment. It will now be easier for companies to
Committee approved the outlines of the country’s secure permits and licenses. The government has
14th Five Year Plan, which sketch out how Chi- reformed its negative investment list, cutting the
na’s economic model will adapt to the new world. number of industries where private investment
First, it will step up efforts to strengthen domes- is limited to just six from more than 300 sectors.
tic demand, especially consumer spending, as an The often confusing and contradictory issuance
engine of growth to reduce its dependence on ex- of regulations by central versus provincial versus
ports. Second, despite confusion about the notion local governments is tackled in the Bill, with the
of dual-circulation among investors, China will central government now having primacy in issu-
persist in opening up its economy, including its fi- ing such regulations.
nancial markets. Third, it will substantially ramp
up efforts to build technological self-sufficiency These are just three examples from large econo-
in key areas such as semiconductors. Innovation mies in the region. But even the smaller econo-
will develop as a much more important driver of mies are looking at ways to adapt to a new and
economic growth and competitiveness. Fourth, it possibly more challenging environment. Vietnam,
will raise the priority accorded to sustainability, for example, has pursued a strategy of free trade
especially with regard to carbon emissions, by agreements (FTAs) with as many economic part-
diverting more resources to developing a low- ners as possible, with its FTA with the European
carbon economy. Union the latest major improvement in the coun-
try’s economic connectivity.
9Voice of Asia
Conclusion: The near term
outlook is modestly good
T
HE COVID-19 pandemic has caused im- These factors will also prepare the region for
mense dislocation throughout the world game-changing innovations and disruptive new
and Asia-Pacific is no exception. It is natu- technologies that are rapidly approaching take-
ral for many of us to feel disheartened about the off. We examine one such area of innovation —
prospects for 2021. Our analysis, while acknowl- the digitalization of payments — in some detail in
edging the potential risks, offers reasons why the the last section of this report.
outcome could be more buoyant. Asia-Pacific
economies will benefit from rehabilitation, rectifi-
cation, and reforms, making for faster and higher
quality growth over time.
10Edition 8 November 2020
Australia: Strong
cyclical recovery
A
USTRALIA has done very well to date in through 2021, risk management remains a cen-
battling the coronavirus and its impact on tral task for policymakers. In particular, the
the economy. Even with the second wave policy swing towards incentives will work best if
in Victoria, Australia has outperformed the world future outbreaks are small and relatively rapidly
on the virus, and that’s allowed outperformance contained, and if vaccines or good antivirals are
in its economy too. relatively effective and arrive soon. There are rea-
sons for hope on both fronts.
Rehabilitation Yet much still could go wrong, so if our forecast
for calendar 2021 GDP growth of 3.1% is to be
2021 looks challenging: this recession arrived fast achieved, policymakers will need to remain vigi-
but will leave slowly. In particular, families and lant, and be willing to add renewed income sup-
businesses face a cash crunch between now and ports if required. Luckily, Australia entered the
March 2021 as wage subsidies and increased sup- current crisis with net central government debt at
port for the unemployed are dialled back, money just 19% of GDP, and is projected to exit with net
from early access to personal pension savings debt at 44% of GDP. Both are low by developed
dries up, and as mortgage and rent deferrals country standards.
run out. Hence the importance of new measures
such as personal tax cuts to encourage families to
spend, and temporary investment incentives and Renewal and reforms
wage subsidies to get firms to spend and hire. At
the same time, the health policy response to fu- What has been harder to achieve has been policy
ture outbreaks is to aim for local lockdowns rath- reforms to help Australia navigate the post-crisis
er than wider metropolitan lockdowns. world. Although there were welcome moves to-
wards the reform of insolvency laws and the free-
ing up of regulatory restraints on credit provision,
Rectification/risk bigger picture reforms have — to date — been
management mostly consigned to the “too hard” basket. That
suggests a strong cyclical recovery is in the offing
Is that enough? With the environment still un- through 2021, but structural support for those cy-
certain and overall fiscal support falling away clical gains could be harder to achieve.
11Voice of Asia
China: A self-sustaining
recovery underway
C
HINA’S V-shaped recovery after it con- expected to rely more on the fiscal levers of pov-
quered the pandemic is nothing short of erty reduction and social programs, but stay away
spectacular. Policymakers have got many from large infrastructure projects.
things right through early and stringent lock-
downs such as that in Wuhan on 23 January. Con- The biggest potential downsides for China are
tact tracing is most effective, even compared to external, mainly deriving from the increased fric-
star performers such as South Korea, Singapore, tions with the US. What started as a trade war
and Germany. China also mounted extraordinary has since spilled over to other areas, especially
campaigns to test populations for the virus when- technology. Trade will remain a source of friction
ever a new cluster of infections was discovered. — the US trade deficit with China did not narrow
For example, the mass swab testing campaign for over the past two years, virtually ruling out any
nine million residents within five days in Qingdao. lowering of tariffs by a future US administration.
The government has mobilized resources for Nevertheless, China has found ways to contain
business resumption. Strong export performance this downside risk. Chinese authorities have exer-
since Q2 reflects how quickly China was able to cised restraint with the US, for example by limit-
resume manufacturing activities and gain from ing the number of American companies covered
a diversion of export demand from countries by Beijing’s Unreliable Entity list. Beijing has
whose supply chains remained disrupted. China’s also wooed US businesses, particularly financial
almost doubt-digit export growth in September services. The offer of more progress in market
also suggest global recovery is now gathering pace access through licenses and eased ownership re-
fast enough to boost China’s growth. In addition, strictions could even be a catalyst for Beijing and
the strong recovery has boosted consumer confi- Washington to find a new equilibrium in their
dence, helped by a buoyant property market. bilateral relationship. If China’s new dual circu-
lation strategy means a wider social safety net
The US dollar’s persistent weakness coupled with and not massive import substitution, China will
interest rate differentials have resulted in capi- remain highly attractive to US corporations, who
tal inflows in 2020 that helped create a capital would be a force pressing for better US-China ties.
account surplus of USD37.4billion over the first Beijing’s efforts to mitigate climate change could
three quarters. also be an area where the US and China can still
collaborate.
With this success behind it, policymakers are
likely to focus on improving the quality of growth, And finally, simply due to the low base in 2020,
first by addressing the uneven recovery between we see 2021 GDP growth at about 7.5%. We ex-
investment and consumption through more ef- pect USD to rebound because the three factors
forts to support SMEs and consumers in 2021. that strengthened CNY in 2020 are set to reverse,
PBOC Governor Yi Gang has also pledged to sta- at least partially. First, relative growth momen-
bilize leverage after China’s debt-to-GDP ratio tum between China and the US will shift. Second,
rose in 2020, a clear change in Beijing’s policy interest rate differentials will narrow. Third, the
stance from the past two years, which allowed for decline in Chinese outbound tourism, which vast-
gradual increases in leverage to promote growth. ly expanded its current account surplus in 2020,
Yi’s remark also suggests there will not be any should begin to reverse.
large fiscal stimulus. In all likelihood, Beijing is
12Edition 8 November 2020
Hong Kong: Returning
to a growth track after
two bad years
T
HE coming year, 2021, will certainly be a bet- steps in restoring cross-border travel, with travel
ter one in terms of economic growth, simply bubbles first formed in the Greater Bay Area, then
due to the low base effect caused by the pan- expanded to other major cities such as Beijing
demic and the earlier protests. Two key factors and Shanghai. At least before a vaccine becomes
will determine how well the Hong Kong economy commercially available, Beijing authorities are
revives — support from the Chinese economy and likely to maintain their efforts to limit imported
the Hong Kong government’s policies. cases. Therefore, Hong Kong’s recovery in tour-
ism is expected to be moderate.
China’s boost to Hong Kong’s financial services is
tangible in the avalanche of mainland company On the domestic front, Hong Kong’s good fun-
IPOs. That will keep trading volumes and related damentals will count. COVID-19 has amplified
activities in Hong Kong’s financial market buoy- differences in approach taken by various govern-
ant amid a lacklustre real economy. US-China ments in containing the virus. Beijing’s approach
trade tensions will remain a wild card for Hong of mobilizing resources to nip the virus in the bud
Kong, where sentiment is often on a roller-coast- was proven to be highly effective and Hong Kong
er ride. Assuming Beijing and Washington find also did quite well. Hong Kong’s world-class med-
a new equilibrium, which would entail adjust- ical facilities are another positive factor in how it
ments by both, Hong Kong’s position as one of faced the challenges from the pandemic.
the world’s leading financial centres will likely
remain intact. The good news is that Hong Kong could continue
to buy growth on the back of its vast fiscal re-
The other key driver from China is tourism. There serves, just as it did in 2020. Furthermore, low
is some concern that Chinese tourists may not interest rates and the weakness of the greenback
return after Chinese New Year. Even if tourists will continue to underpin the housing market.
eventually return, we could see gingerly gradual
13Voice of Asia
India: Strategic focus on
jobs, the services sector,
and private demand
will aid growth
E
CONOMIC activity is showing signs of trac- witness a modest rebound as social distancing
tion. The PMI manufacturing index is at its and consumer caution ease. A renewed focus on
highest since 2008. Stronger car sales, ris- improving the skills base (education) and digiti-
ing production of finished steel and diesel con- zation could help the sector rationalize costs, im-
sumption, and higher goods and services tax rev- prove productivity, and address new markets. An
enue collections indicate that the economy has effort to build the Global In-house Centres (GIC)
bounced back strongly since “the unlock”, backed of the world by prioritizing the above and being
by pent-up and festive season demand. Neverthe- agile in doing business could revive the services
less, sustaining this rebound could be a challenge sector.
next year, if infection cases continue to be high.
We expect India’s GDP to rebound to double dig- A sustained recovery in private demand: Rural
its in FY2022 after contracting in FY2021. demand will continue to benefit from the good
monsoon in 2020 and the government’s support
Three drivers will ensure a sustained economic for rural employment. However, urban demand
revival and rehabilitation: could be restrained by the continued fear of in-
fections, uncertainties around employment, and
Inclusive job growth: Government policies that consumers increasing precautionary savings.
focus on the infrastructure, construction, manu- Weak demand could translate into slow invest-
facturing, and retail industries can quickly gener- ment and the economy might get stuck in a low
ate employment for low-skilled workers, improve demand-supply vicious circle.
private sector performance, and increase activity
amongst micro, small, and medium enterprises Hence, the key role of policy support. Since the
(MSMEs). The government’s measures, such as pandemic the government has announced a se-
interest-free 50-year loans to state governments ries of stimulus packages in phases. The first, an-
to boost infrastructure spending, and its vision nounced in May, intended to boost the supply
of a self-sufficient India (the Atmanirbhar Bharat side of the economy and provide credit to vulner-
package), among others, are expected to improve able segments of the population to support lives
infrastructure investment and tap into the poten- and livelihoods. Over the past month, the govern-
tial of the capital goods, chemicals, and electron- ment announced two additional stimulus packag-
ics industries. Strategic partnerships with private es (targeting the demand side) to boost consumer
players are key. spending, investment, and employment. Several
difficult labour and agricultural reforms over and
A robust services sector rebound: Services account above the stimulus packages were announced as
for over 55% of GDP and the sector’s recovery is well. The government’s effective policy measures
gradual so far. According to PMI, it returned to together with prudent business strategies should
growth in October for the first time since the pan- help the economy grow strongly from the next fis-
demic. The trade, hotels, transport, and commu- cal year.
nication sector (contributing a fifth of GDP) could
14Edition 8 November 2020
Indonesia: Recovery
delayed, but not derailed
I
NDONESIA was particularly hard hit by the pan- First, the infrastructure agenda will be a focused
demic as the government struggled to enforce one, as indicated in the revised list of national
effective measures to restrain the spread of the strategic projects. Plans to construct a new capi-
virus. Other factors have also worked against In- tal city will proceed, and if done right will create
donesia in 2020. For example, demand for crude economic synergies in Borneo.
palm oil, which supports millions of smallholders,
was hurt by the economic slowdown in Europe Second, Indonesia will continue to make some
and India, two of the largest importers, despite progress in moving up the value-chain, with more
the B30 mandate to gird domestic demand for the investments in smelter projects, the development
vegetable oil. Although China, by far the single of a buzzing eco-system for electric vehicles, and
most important destination for Indonesian coal petrochemical refineries for import substitution.
exports, has recovered from the pandemic, that
has not translated into higher commodity prices Third, labour reforms approved by the adminis-
yet, underscoring the importance of a global syn- tration will help Indonesia attract a bigger slice
chronous recovery even for a domestically-driven of outbound investments from China that have
economy like Indonesia’s. Moreover, the tardy hitherto bypassed the archipelago due to sky-high
disbursement of public funds has not helped ei- severance costs and bureaucratic hurdles.
ther, so the impact of promised spending on so-
cial transfers to keep the economy afloat has been But the effects will only be apparent once the pan-
more limited than desired. demic subsidies in Indonesia, and there is more
clarity on the implementing regulations, which is
A sharp rebound is unlikely, considering the due by early-2021 at the latest.
lasting hit to consumer and business confidence
across the sprawling archipelago. But there is
reason to be upbeat over the economy’s prospects
once the pandemic subsides.
15Voice of Asia
Japan: Well-contained,
economic recovery is consistent
I
N late May the government lifted the state of tinued restrictions on cross-border travel. Sec-
emergency, and the Japanese economy is re- ond, once fiscal support is scaled down, personal
covering, but slowly. Some of the factors that incomes could contract and depress consumer
mitigated the damage caused by the pandemic spending. The administration of new Prime Min-
will continue to hold into 2021. ister, Yoshihide Suga, started planning the third
supplementary budget and is likely to maintain
First, Japan contained the spread of COVID-19 policy continuity. Still there is some uncertainty
relatively well. Although there were rebounds in as to how the government will maintain fiscal
the number of cases after lockdown was eased, policy given its inflated debt, which is expected to
the number of daily cases is around 2,000, well jump up to 216.4% of GDP in 2020 from 192.5%
below those of countries with severe rebounds. in 2019.
Second, the government and the central bank
moved quickly to address economic risks from Finally, there is still severe damage to business
the pandemic. Further quantitative easing, en- and household economic conditions, which would
couragement for banks to extend funding to con- require fundamental reforms to sustain growth.
sumers and businesses and the JPY230 trillion We estimate it will take more than five years for
(USD2.2 trillion) fiscal stimulus package have Japan GDP to return to pre-COVID levels. A po-
all helped. Third, some sectors such as commu- tential surge in credit losses in the banking sector
nications and IT are benefiting from increasing could weaken financial stability.
demand from tele-commuters and workers from
home, and digitalization. Retailers expanded on- We expect the economy to rebound to 2% an-
line sales to meet consumers’ demands. nual growth in 2021 after a 6% contraction in
2020. The economy should return to its potential
Nevertheless, some headwinds remain. First, a growth rate of 1.4% in 2022.
slow recovery in global demand could hold back
a recovery in key sectors such as manufacturing.
Tourism spending will stay restrained by con-
16Edition 8 November 2020
South Korea: A solid
rebound in the offing
I
N 2021, South Korea should recover sufficiently tive will also expand unemployment insur-
from its contraction in 2020 and progress to- ance coverage to people engaged in all forms
ward its pre-COVID-19 level. Domestic eco- of employment. These initiatives are expected
nomic activity will benefit from effective yet rela- to help maintain employment and facilitate a
tively less disruptive virus control measures and steady economic rebound from 2021.
targeted fiscal policy aimed at supporting house-
hold income and employment. External demand • Meanwhile, the government will encour-
should also recover, prompting increases in out- age domestic innovation and sourcing in the
bound shipments of semiconductors, electronic manufacturing sector in the face of grow-
devices, and healthcare products. ing competition from China and global trade
protectionism (particularly Japan’s export
South Korean telecommunications companies restrictions targeting South Korean high-tech-
will benefit from the technology bifurcation be- nology manufacturing). The government is
tween the United States and China as they in- expected to maintain its policy support for do-
crease global market share due to the retreat of mestic manufacturers, while remaining open
China telecoms companies such as Huawei. US to foreign investment.
restrictions on sales to Huawei will affect South
Korean semiconductor manufacturers, but it is • In 2021, Bank of Korea (BOK) is likely to re-
expected that the related loss in revenue will be tain its moderate monetary policy stance, by
offset partly by increased sales to other buyers in maintaining its policy rate at a record low of
China and elsewhere, which are likely to raise or- 0.5% throughout the year, while extending its
ders in an attempt to increase market share. program of incentivizing commercial banks to
provide low-interest loans to SMEs. BOK will
Policy measures will continue to support the also probably extend its government-bond
economy in 2021: purchase program to keep long-term inter-
est rates low. That, and the good appetite for
• Under the “Korean New Deal”, the govern- South Korea sovereign bonds among interna-
ment will invest KRW160trn (USD133bn) in tional investors, should prevent sharp spikes
2020-25 to improve job creation and enhance in bond yields.
the competitiveness of the domestic manufac-
turing sector through public projects in digital
and green energy infrastructure. The initia-
17Voice of Asia
Malaysia: Headwinds to
limit degree of rebound
T
HE Malaysian economy will enter 2021 er electronics, has been a standout perform-
weakened by the imposition of new lock- er in Malaysia, thanks to a well-diversified
downs in areas that account for close to half economic base.
of GDP. Lower-for-longer oil prices are a double-
whammy for the economy, as petroleum revenues • It is also expected that the budget for 2021
and exports of petroleum products take a beat- will contain handouts and social assistance
ing. The tourism, aviation and hospitality sec- for households, providing a tailwind for
tor, which is increasingly reliant on tourists from private spending.
China, has been gutted by the pandemic and a full
recovery is unlikely to take root any time soon. • Inflows of investments from China are anoth-
Sub-par crude palm oil prices haven’t helped. er likely tailwind. These consist of infrastruc-
tural investments that have restarted develop-
Looking forward, several headwinds are likely to ment in earnest, such as the East Coast Rail
buffet the economy in 2021,with some tailwinds Link and Melaka Gateway, plus manufactur-
as well: ing and electronics investments from firms
moving out of China. This, combined with
• Political uncertainty and the prospect of snap more clarity on the government’s medium-
elections could hold back the recovery in and long-term development plan (due for re-
spending by corporations and households. lease in December 2020), and the revamped
12th Malaysia Plan (to be released in January
• The expiration of the loan moratorium 2021) should provide a fillip to and crowd-in
scheme from 4Q20 could also depress house- private investments in the medium-term, ex-
hold spending, especially given rising levels of panding the economy’s productive capacity.
household debt.
• But the trade-driven economy should benefit
from the normalization of external demand.
The resilient tech sector, particularly consum-
18Edition 8 November 2020
New Zealand: Still highly
susceptible to global conditions
N
EW Zealand seems to be in a better situa- chase quantitative easing program of NZD30bn
tion than many of its major trading part- in March, which was later increased to a total
ners in terms of minimizing the number of purchase ceiling of NZD100bn extending to mid-
coronavirus cases, but has had to maintain tight 2022. In November, the RBNZ added further to
border restrictions to do so. Still, some green its policy toolkit with a Funding for Lending Pro-
shoots are beginning to appear. Recent business gramme (FLP) which will start in December 2020
surveys suggest firms are feeling much more op- and provide an estimated NZD28 billion. The FLP
timistic about the economy and their own pros- aims to further depress market interest rates and
pects than they were a few months ago. House- RBNZ has left the door open to move its bank pol-
holds, on the other hand, remain cautious, with icy rate into negative territory in 2021 if economic
those working in the hospitality and tourism sec- data remains soft. Inflation fell further to 1.4%
tors particularly downbeat. year-on-year in September, adding to market ex-
pectations that the RBNZ will lower OCR further
One big positive for the local economy is a surge near the start of 2021.
in house prices, driven by ultra-low interest rates
and the removal of bank lending restrictions. Although the New Zealand economy is weather-
Strong demand from investors and first-home ing the economic fallout of the pandemic better
buyers, combined with limited supply in the mar- than initially predicted, it remains highly sus-
ket, saw prices appreciate 13.5% over the year to ceptible to global conditions. As a small export-
October, according to the Real Estate Institute of ing nation, continued weak offshore demand will
New Zealand. New Zealanders typically use hous- prevent a full recovery. Tourism, education and
ing as a large store of their wealth, so rising house businesses that rely heavily on exports will not be
prices boost consumer confidence and people’s able gather enough momentum without the help
propensity to spend. of the rest of the world. With many regions now
experiencing big second coronavirus outbreaks,
The Official Cash Rate (OCR) has remained on risks to New Zealand’s outlook are skewed toward
hold at 0.25% since March this year, but banks the downside.
have been told to prepare for a negative policy
interest rate. The Reserve Bank of New Zealand
(RBNZ) also introduced a Large-Scale Asset Pur-
19Voice of Asia
The Philippines: Sharp
rebound in abeyance
T
HE Philippines has borne the brunt of the • A recovery in remittances (accounting for a
pandemic with one of the most stifling lock- tenth of GDP) is likely once the global econ-
downs in the region. Although it has now omy perks up, and will prop up household
turned to localised lockdowns, there will still be a spending while shoring up external accounts.
toll on the economy so long as the virus continues
to claim victims. Given the fiscal constraints on • A reset of the infrastructure agenda is also
the administration’s capacity to disburse funds to on the cards, as funds will no longer need to
keep the economy afloat, authorities are likely to be diverted towards healthcare in 2021. That,
decide on a calibrated reopening of the economy together with the looming 2022 general elec-
in the near-term. But a number of headwinds will tions, should see a renewed emphasis on pub-
continue to hurt the Philippines in 2021: lic works project as authorities would want to
get these up and running if and before they
• Political risk has risen in light of President hand over to a new administration.
Duterte’s ill-health and the re-positioning of
congressmen for the 2022 general elections, • The business process outsourcing (BPO) sec-
evinced by the political machinations that tor has coped well with work-from-home ar-
rocked Congress recently. Geopolitical risks rangement, thanks to better internet connec-
remain salient, evinced by the exodus of gam- tivity in the capital region, which is where the
ing companies that used to cater to Chinese industry is concentrated. But there are some
gamblers, and possible tensions with China in longer-term concerns of dislocation to BPO,
the South China Sea. spurred by the march of automation and AI.
• Persistent instability in the mineral-rich, res- • The administration is eyeing the mining sec-
tive south — twin bombings in the south of tor as a new growth driver with plans to priva-
Sulu Province in August 2020 — remains an- tize several mining assets. Economic manag-
other area of concern, as authorities look set ers hope that this will not only raise additional
to revive the mining industry through a new revenues for cash-strapped governments, but
bout of liberalization. also help buoy the sector and unleash employ-
ment opportunities for rural residents.
Still, we believe the Filipino economy is poised for
better days.
20Edition 8 November 2020
Singapore: A precarious
recovery
W
ITH a GDP contraction of 5.8% year-on- • The lone area where we envisage a material
year in 3Q20, an improvement from acceleration is the information and commu-
-13.2% in 2Q20, the supply-side recov- nications technology sector, on account of
ery of the Singapore economy is mostly complete. stronger demand for IT solutions as digital
transformation, already advanced, is accel-
• We envisage a broader recovery in manu- erated. The relocation of Chinese technology
facturing in 2021 as the shape of global de- firms such as Bytedance and Tencent will add
mand broadens, while tech demand remains a fillip to the sector as well.
vibrant enough to boost the all-important
electronics sector. There are three key risks to the economy in the
near-term.
• However, the performance of the services sec-
tor will remain highly uneven. Even with more • First, elevated unemployment will weigh on
travel bubbles, the travel and tourism sector aggregate demand as households cut back
will likely stay in low-gear for some time as on discretionary spending. The recent flur-
international borders are reopened very cau- ry of tax and fee increases could also hurt
tiously. Consumer-facing sectors are likely to consumer confidence.
taper off after a sharp rebound in 3Q20 as soft
labour market conditions weigh on confidence. • Second, there is a risk that credit conditions
tighten as we head into 2021 as banks become
• External-oriented services, such as wholesale cognizant of the health of their balance sheets
trade, transportation, and storage, will stage a and begin to pare back lending.
fuller recovery in 2021 as the shape of global
demand and trade broadens beyond electron- • Third, the lack of commitment to new and
ics and pandemic-related demand for phar- significant fiscal support for the economy
maceuticals and medical equipment, which suggests “fiscal cliff” effects are likely to
has been robust year-to-date. The finance and be material.
insurance sector, which powerfully supported
growth in 2019, will continue to expand, albeit
more modestly, as sluggish output weighs on
credit demand.
21Voice of Asia
Taiwan: Surprising
on the upside?
T
AIWAN’S economy has performed remark- over the Taiwan Straits. Meanwhile, Taiwan’s
ably well in 2020 and is likely to avoid the high tech companies are reallocating their supply
contractions seen in much of the world chains and increasing their investment in digitali-
with GDP growth close to 2%. This is particu- zation and green energy.
larly impressive given most small, highly-open
economies (such as Hong Kong and Singapore) Policy responses will be another factor. Taiwan’s
have struggled. central bank is expected to keep short-term inter-
est rates unchanged, and fiscal policy is expected
Taiwan’s economic resilience has been under- to play a counter-cyclical role by extending relief
pinned by a combination of the government’s to consumers, and firms that have seen their sup-
success in containing the pandemic (which meant ply chains disrupted in the wake of COVID-19.
the economy was not dislocated by severe lock- With global interest rates staying low and the
downs) and Taiwan’s expansive exposure to the New Taiwan Dollar relatively under-valued, Tai-
global technology cycle. Looking forward to 2021, wan could easily tolerate a higher debt-to-GDP
several factors will come into play. First, the Chi- ratio. Assuming the global economy continues to
nese Mainland remains a curious mix of massive recover in 2021, we anticipate Taiwan to register
opportunity and perturbing uncertainty. If the strong GDP growth of about 3.5% in 2021. Finally,
Chinese economy accelerates as much as we an- Taiwan would also benefit from the global shift to
ticipate in 2021, there will be positive spill overs new energy and the “new normal” of cheap crude
for Taiwan’s manufacturing sector. However, the in 2021, as it did in 2020.
risk in Sino-US relations could cast a shadow
22Edition 8 November 2020
Thailand: On the edge
T
HE Thai economy has underperformed the from more favourable weather conditions and a
region this year despite containing the CO- fiscal package designed to provide substantial re-
VID-19 pandemic. The economy’s heavy de- lief to households. That said, the sluggish, uneven
pendence on tourism has hurt it deeply. Tourist pattern of recovery in coming quarters suggests
receipts amount to 11% of GDP, but with indirect a high degree of labour market slack that could
spill overs added in drives close to 25% of GDP. weigh on wage growth and thus dent consumer
confidence.
We see this underperformance continuing in
2021, as borders to international travel re-open Fiscal largesse will also play a role in support-
only cautiously given elevated virus caseloads in ing the economy in 2021, with the government
Europe (16.8% of tourist arrivals in 2019) and attempting to expedite several planned infra-
parts of Emerging Asia (26.6%). On this count, structure projects in the pipeline. However, we
a mooted travel arrangement with China, which expect sub-par disbursement efficiency to con-
drove nearly 30% of tourist arrivals to Thailand in strain the eventual impact on GDP growth. New
2019, could if implemented provide much needed finance minister Arkhom Termpittayapaisith has
succour to the systemically-important tourism signalled expanded fiscal stimulus, given ample
sector, and lift the growth outlook for 2021. policy space with public debt-to-GDP still low.
Crucially, we expect Thailand’s export growth to Bank of Thailand likely sees limited policy space
remain relatively sluggish as global demand picks for further rate cuts, but has kept the door open to
in 2021 vis-à-vis regional peers like Singapore, unconventional policies such as yield curve con-
Malaysia and Vietnam, whose export mix exhibits trol and quantitative easing, which could comple-
a greater tilt to technology. In turn, a moribund ment fiscal largesse.
export outlook and still-elevated industrial capac-
ity are expected to weigh on business investment. Political risks have also risen, which could lead to
protracted uncertainty.
As a consequence, private domestic demand will
largely be driven by consumer spending, which
we see supported by improving farm incomes
23Voice of Asia
Vietnam: Poised for
acceleration
R
EAL GDP growth rebounded sharply to tegic” sectors such as pharmaceuticals and medi-
2.6% from a year earlier in the third quar- cal equipment to be diversified and/or re-shored.
ter of 2020, up from 0.4% in 2Q20, led
by accelerating momentum in services that Second, Vietnam’s economy is deeply integrated
added to resilient agricultural exports and into the regional technology supply chain, so will
manufacturing activity. benefit strongly from the continued upturn in the
global electronics cycle that we envisage on ac-
With all growth engines oiled and ready for igni- count of stronger consumer spending on gaming
tion, the country successfully containing a sec- products in the holiday season, 5G handset up-
ond wave of virus caseloads in July, and support grades, and automobiles — the sector most geared
from fiscal and monetary policy, the economy is to global GDP — making for a smooth handoff
poised for further acceleration. The main drivers from enterprise IT and work-from-home related
of growth will be exports and private investment, spending that supported the cycle this year.
with consumer spending also playing an accretive
role. Third, Vietnam’s comprehensive set of free-
trade agreements with its major trading partners
In a sign of confidence in the near-term growth will play an important role in supporting export
outlook, Prime Minister Nguyen Xuan Phuc growth amid a likely more protectionist trade en-
raised the government’s growth target for 2020 vironment.
to 3.0% from 2.5%.
On the policy front, we expect State Bank of Viet-
Vietnam’s highly open frontier economy has sev- nam, which has cut major policy interest rates
eral structural tailwinds behind it that will con- across the board three times this year, to refrain
tinue to shore up growth in 2021. from further stimulus on account of the mani-
festly improved growth outlook and residual in-
First, it is a major beneficiary of ongoing supply flation fears, given the large share of food in its
chain shifts in the region, which have accelerated CPI basket.
amid geopolitical and trade tensions between the
US and China, and calls for supply chains in “stra-
24Edition 8 November 2020
What the US election
means for Asia-Pacific
T
HE election of Joe Biden as President of the • Technology: Here too, the US side will con-
United States has four broad sets of implica- tinue to be wary of China. The new adminis-
tions for the Asia-Pacific. tration will continue with restrictive measures
on China, but we expect these to be more
selective. The risk of technology bifurcation
1. Better management of will remain.
still-tense US-China relations:
Against this, we also believe the Biden team will
The United States-China relationship is now the be open to combining a tough posture on China
single most important bilateral relationship in on the above issues with a greater willingness to
the world. No one should expect frictions between collaborate with China on issues of mutual inter-
the US and China to diminish substantially, as the est. President-elect Biden is committed to action
fundamental strategic interests of China and the to tackle climate change and his advisors realize
US now diverge in many ways, especially in the cooperation with China and other large econo-
western Pacific. The incoming Biden Adminis- mies will be vital in this area. Similarly, contain-
tration will have to accommodate the fact that a ing possible threats posed by North Korea in the
large part of the American political spectrum has Korean peninsula will remain an important objec-
come around to the view that China poses a stra- tive for the US administration. Biden is unlikely
tegic threat to it, and that the United States has to shift away from the Trump Administration’s
to meet this challenge across diplomatic, military implicit acceptance of North Korea as a nuclear
and economic fronts. On the Chinese side, mean- power, but will want to maintain strict sanctions
while, the Chinese political elite has developed a on the North Korean regime to constrain its abil-
more dour view of the United States. Trust has ity to threaten the mainland United States. To be
been fractured and there cannot be a return to the successful, any American strategy on North Korea
relationship that existed before President Trump. will need some degree of Chinese support.
Nevertheless, we anticipate that although the
Biden Administration will make no bones about 2. Trade policy is likely to be
the need to contain China, it is also likely to adopt managed with some finesse:
a more nuanced approach than its predecessor
did. Biden’s track record has been one of multilateral-
ism, and this should apply to the trade arena, but
• Trade: The new administration will not be only up to a point. He is not likely to be as com-
soft on China. We expect current tariffs to re- mitted to free trade as, say, President Clinton was.
main in place, as the two sides negotiate a new Under Biden, the United States will still adopt a
trade pact. However, Biden does not appear robust approach on issues such as “currency ma-
inclined to aggressively expand the trade war. nipulation”, market access and bilateral trade def-
icits, which could give rise to trade tensions with
China, Japan and East Asian exporters.
25Voice of Asia
Still, while Biden’s trade team won’t want to be should also be positive for intermediate goods
seen as soft on its trading partners, the United such as electronics components, which East and
States approach will become less confrontational. Southeast Asian economies specialize in.
We see continued efforts to press its trade part-
ners to adopt voluntary actions to adjust their
bilateral trade deficits with the United States. 4. Rebuilding alliances and
We also expect Biden’s trade advisors to return greater outreach to allies:
to a more cooperative policy towards the World
Trade Organization (WTO). There is likely to be The new administration’s approach is likely to be
a compromise on the appointment of a new WTO welcomed by smaller nations in Asia-Pacific, es-
director-general, and the US is likely to resume pecially trade-oriented economies. For the latter,
allowing new appointments to the WTO’s arbitra- a rules-based trade regime cantered around the
tion panel, thus allowing the WTO’s dispute reso- WTO is key, as is an international political and se-
lution function to resume. curity order based on agreed “rules of the game”.
An America that veers away from the transac-
There is little likelihood of the US returning to the tional and bilateral approach favoured by Presi-
Comprehensive and Progressive Trans-Pacific dent Trump will be seen positively in the region,
Partnership (CPTPP) agreement, but the admin- as will the expected return of the United States
istration could be open to selective paths to great- to the Paris climate accord and the World Health
er economic engagement with the members of the Organization.
CPTPP.
• The Association of Southeast Asian Nations
(ASEAN) is likely to be a big winner. South-
3. More policy stimulus east Asia is China’s backyard and a likely are-
will boost US demand na for big power contests. Biden’s likely for-
eign policy team has considerable knowledge
for Asian exports: of the region and its importance: there will be
Several factors are likely to confluence to produce more US engagement with ASEAN in trade,
stronger US demand for Asian commodity and infrastructure, investment, and technology.
manufactured exports:
• India is likely to be another major beneficiary.
• There is a good likelihood of continued strong The Biden Administration is likely to continue
fiscal spending that will boost the US economy the Trump Administration’s strong push for
and thereby raise global demand. Such ad- closer military and strategic ties with India.
ditional fiscal stimulus, which the economy
needs, but has been delayed by political grid-
lock, is likely to at last be implemented. Conclusion
• Over the course of the year, we also expect In short, the incoming administration is likely
agreement on a large infrastructure program. to help reinforce a more benign outlook for the
region in 2021. A United States with a stronger
• Defence spending and government support economy, more willing to engage productively
for R&D is also virtually certain to grow. with its economic partners, and that pursues its
strategic goals rationally and in concert with al-
Not only should overall US import demand grow, lies, can only be good for Asia-Pacific.
but the pattern of spending described above
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