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. Any assessment of impacts must recognise that the spread of the virus is evolving in unpredictable ways
Jayant Menon
17 March 2020
The coronavirus (COVID-19) pandemic is first and foremost a human tragedy. But the measures introduced to deal with the pandemic are having wide-ranging economic effects, and inducing its own contagion. Since studies estimating economic impacts (by academics, multilateral agencies and the private sector) already exist, we focus instead on the transmission channels and issues important in assessing the assessments, 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. In ASEAN, COVID-19 disrupted the tourism and travel sectors first. Related industries such as airlines and hotels, were the first to be affected, and conditions are worsening. Within the region, supply chain disruptions, the impact on labor supply and uncertainty is also driving negative sentiment. All of these affect trade, investment and output, which affects growth but with different timelines.
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 about 18 per cent of global trade in parts and components, the cost of the disruption in the short run will be high. This is also affecting labor supply through changes in work practices and the like, but telecommuting and other technological aids can limit the fall in productivity.
All these disruptions will lead to sharp declines in domestic demand. These factors will feed on each other operating through their impact on economic growth. This compounding effect can magnify and extend short run effects into the long run.
The highest cost, however, could come from the intangibles. The effects of negative sentiment about growth and general uncertainty, which is already affecting financial markets, will feed into lower investment, consumption and growth in the short- and medium term.
The uncertainty over the progression of the virus and its impacts is fuelling panic amongst investors and consumers, and even governments. This has led to irrational behaviour such as hoarding, and overreaction, which is manifested in lockdowns and curfews. Such policies and actions can increase the risk of the outcomes they are designed to mitigate, especially if they ignore local conditions relating to governance, institutions and implementation capacity.
The highest cost, however, could come from the intangibles. The effects of negative sentiment about growth and general uncertainty, which is already affecting financial markets, will feed into lower investment, consumption and growth in the short- and medium term.
If the final outcome is rolling recessions around the world, despite the mounting stimulus measures being contemplated, then there will be significant and non-transitory effects on employment and welfare. Some degree of decoupling from China, or de-globalization in general, may also be a permanent reminder of this pandemic.
Impacts on ASEAN
Turning to the ASEAN region, Singapore, Malaysia and Thailand are heavily engaged in regional supply chains and are likely to be the most affected by a reduction in final demand for the goods produced within them, and by the restructuring that will take place.
All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent. Taken together, ADB estimates that Thailand could be the worst affected of the original ASEAN members. Indonesia and the Philippines have been increasing their involvement in regional supply chains and they will 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. Although this will cause disruption during the relocation phase, some countries in ASEAN could benefit from the new investments, mitigating overall negative impacts.
Vietnam is the only new ASEAN member integrated into supply chains through China, and is already suffering supply disruptions. Cambodia and Laos receive most of their investment and aid from China, and a marked growth slowdown there will affect them, the region, and the world.
Several Mekong countries, and the Philippines, have large overseas foreign worker populations and any restrictions on their movement or employment prospects as COVID-19 spreads will have deleterious consequences on domestic output.
Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will hit them hard. The others will benefit from lower prices, as will the hard-hit transport sector.
In identifying both the short and run long run impacts of COVID-19, it is important to delineate its marginal impact from observed outcomes. This requires an analytical framework that can measure deviations from a baseline scenario which incorporates pre-existing trends. Therefore, a modelling exercise, rather than casual empiricism, is required. This is important because the remedy may vary depending on the cause of the disruption.
Even before the outbreak, risks of a global growth slowdown were already rising. This was driven a number of factors, including the proliferation of free trade disagreements, which generally refer to actions aimed at pushing back the broader effects of globalization. The restructuring of regional supply chains had already 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 therefore be misleading to attribute all of the current disruption to COVID-19 alone. This is easy to do, and has been happening. In fact, had the trade war not preceded it, COVID-19 may have resulted in greater disruption to supply chains.
Finally, any assessment of impacts must recognize that the spread of COVID-19 is evolving in unpredictable ways. The difficulties of estimating the impacts of a shock which is itself uncertain are self-evident, and various scenarios should be considered. Currently, the trend points to risks rising, sometimes accelerating, although this can change suddenly, as with previous epidemics. This uncertainty underscores the need for caution in assessing, and regular recalibration in producing assessments.
Dr Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS – Yusof Ishak Institute.
ISEAS Commentary – 2020/31
The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute. No part of this publication may be reproduced in any form without permission.