TOKYO – Western economies and populations were hammered far harder than East Asia as the world struggled to contain Covid-19 in 2020. But in the vaccination era of 2021, the region’s luck is running out. “The contagious Delta strain is sweeping through Asia and hurting Asia’s economic recovery,” says Katrina Ell at Moody’s Analytics. Numerous economies, Ell says, are “dealing with fresh outbreaks and restrictions this week with Indonesia the most problematic and likely to be the hardest hit. Japan, South Korea, Australia and Vietnam will also be adversely impacted to varying degrees by fresh restrictions suppressing domestic demand.” These recent developments represent a grim about-face. This year was supposed to be Asia’s year, led by China’s powerful revival. Overcoming – and avoiding the
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TOKYO – Western economies and populations were hammered far harder than East Asia as the world struggled to contain Covid-19 in 2020. But in the vaccination era of 2021, the region’s luck is running out.

“The contagious Delta strain is sweeping through Asia and hurting Asia’s economic recovery,” says Katrina Ell at Moody’s Analytics.

Numerous economies, Ell says, are “dealing with fresh outbreaks and restrictions this week with Indonesia the most problematic and likely to be the hardest hit. Japan, South Korea, Australia and Vietnam will also be adversely impacted to varying degrees by fresh restrictions suppressing domestic demand.”

These recent developments represent a grim about-face. This year was supposed to be Asia’s year, led by China’s powerful revival. Overcoming – and avoiding the worst of – the pandemic was expected to be a uniquely Asian triumph.

Those expectations look increasingly dashed, however. Instead, third and fourth waves of infection are imperiling the outlook with each passing day. Thanks to a combination of complacency, glacial vaccination rollouts and new highly transmissible variants, Asia is fast becoming a cautionary tale of the dangers of blowing the endgame.

Things fall apart

Malaysia and Indonesia are again in lockdown mode as seven-day averages for new infections spook leaders and investors alike. The Philippines is stuck in a stop-go cycle, whereby Manila announces social-distancing decrees, eases up at the slightest bit of good news — and then is forced to clamp down anew.

Singapore was forced to cancel the giant in-person Davos event the Switzerland-based World Economic Forum had planned for next month. The city-state’s travel “bubble” with Hong Kong may soon be scrapped.

Even Vietnam, initially celebrated for avoiding a single Covid death, is announcing lockdowns – the sprawling Ho Chi Minh City included. In New Delhi, Prime Minister Narendra Modi’s chest-thumping over India having beaten the pandemic is aging terribly as Covid-19 upends the economy.

A street artist paints a mural depicting Covid-19 frontline workers along a street in Hanoi on June 15, 2021. Photo: AFP / Nhac Nguyen

China, meanwhile, has locked down its border towns with Myanmar as Covid-19 wracks a nation beset by political instability. The mainland has battled its own fresh clusters, including in Guangdong province, a vital export center.

Meanwhile, grave doubts about the effectiveness of Sinovac Biotech’s vaccine in Indonesia, Singapore, Thailand and elsewhere are casting a storm cloud over President Xi Jinping’s medical diplomacy.

Developed Asia is also taking hits.

Since July 8, South Korea has been reporting record daily infection rates and on Monday implemented the harshest social distancing measures yet seen. A sign of urgency in Seoul: government officials are literally micromanaging which high-energy pop songs gyms can and can’t play and slowing treadmills to a maximum of 6 kilometers per hour.

In Japan, the long-awaited Tokyo Olympics is going to take place while the city is under a state of emergency. The Games will be a hermetically sealed affair without spectators, with strict controls on visitors’ movements and with alcohol-free dining sure to dampen any defiant party spirit.

As this fourth wave of infections blankets their respective nations, President Moon Jae-in and Prime Minister Yoshihide Suga’s efforts to vaccinate are hitting walls due to shortfalls in vaccine supplies.

Australia’s impressive mitigation success, meantime, is now in jeopardy. Sydney is in lockdown yet again, at least until July 16. The economic impact is fast intensifying, as the city is home to 20% of Australians and is the epicenter of the nation’s tourism industry.

A common theme is apparent.

“A uniting theme of these economies struggling with a Covid-19 resurgence and renewed social distancing is their sluggish domestic vaccination schedules,” says Ell at Moody’s. “All of these economies are far from herd resilience, making them vulnerable to ongoing lockdowns pressuring domestic demand and the broader recovery, a situation that may continue through the second half of 2021.”

All this pandemic heat in mid-2021 will make 2022 an incredibly uncertain year for Asian economies, from richest to poorest.

Residents of Antipolo City, Philippines, wait to receive their Covid-19 shot in the vicinity of a church that acts as a vaccination site, on June 24, 2021. The country is lagging on vaccination. Photo: Ryan Eduard Benaid / NurPhoto via AFP

Measuring the impacts

By October, Japan needs to hold a general election. Suga’s approval numbers are in the low 30s at a moment when upwards of 80% disapprove of holding the Summer Olympics amid a pandemic.

This complicates the ruling Liberal Democratic Party’s odds of winning a clear mandate in the Diet’s lower house.

“The biggest wildcard is the emergence of a new Covid-19 wave in parts of Japan,” says analyst Ali Wyne at Eurasia Group. “Suga continues to face criticism for his handling of the pandemic, and just over 15% of the population has been fully vaccinated.”

In developing Asia, vaccination rates are a fraction of that – including some that are vital to global manufacturing. Vietnam, a nation of 96 million, has administered shots to only 4% of the population as new variants emerge. Restricting movements in Ho Chi Minh City, the financial capital, will inevitably hit gross domestic product.

“It’s a difficult decision to lock down the city,” Prime Minister Pham Minh Chinh said on July 8. “But it is necessary to curb the pandemic and get back to normalcy.”

In the Bangkok metropolitan area, more than 10 million people are under fresh social-distancing decrees and curfews. Prime Minister Prayut Chan-ocha has come under intense criticism both for unsteady mitigation policies, ad hoc rule enforcement and not acting faster to procure vaccinations.

“Downside risks are rising,” warns economist Radhika Rao at DBS Bank. The combination of rapid downgrades in corporate earnings and falling household incomes, she adds, augers poorly for the economy in 2022.

Thai hospital workers wearing personal protective equipment (PPE) carry a coffin with the body of a woman who died from the Covid-19 coronavirus as they bury her at Ban Yakang cemetery in the southern province of Narathiwat, July 11, 2021. Photo: Madaree Tohlala / AFP

Adds analyst Jim Reid at Deutsche Bank: “This situation is certainly a concern to the opening up trade.”

Indonesia is a particular worry. “A wave of Covid-19 infections threatens the pace of Indonesia’s economic recovery and heightens risks for the country’s banks and non-bank lenders,” says analyst Gary Hanniffy at Fitch Ratings.

The “swell in Covid-19 cases is likely to boost the number of borrowers seeking restructuring extensions from banks and non-bank lenders, delaying their return to normal repayment schedules,” Hanniffy says.

“It also raises the prospect of an extension of regulatory forbearance on loan restructuring to beyond the current planned closing date of end of the first quarter of 2022 for banks and April 2022 for non-banks.”

That’s emblematic of what’s afoot in the region.

A June survey by the Japan Center for Economic Research and the Nikkei in Indonesia, Malaysia, the Philippines, Singapore and Thailand found sobering results. The average 2021 growth rate of the five nations might be 4.1% – down 0.2 points from a few months ago.

Government options running low

So, much has changed over the last couple of weeks. As Delta and other variants spread, the red pens will come out to downgrade predictions. That’s partly because there are big limits to what governments can do to safeguard growth.

The last 18 months saw a frenzy of central bank interest rate cuts, fiscal stimulus spending and regulators demanding banks go easy on debtors. That means the powder is running short to support efforts in the second half of 2021.

Inflation fears are another challenge. There’s chatter that monetary authorities from Mumbai to Jakarta favor tossing more liquidity into markets. Yet surging commodity prices raise two risks. One is fanning asset prices, adding to upward price pressures. Two, any resulting drop in currencies could see Asia importing dangerous amounts of energy inflation.

The balancing act is a difficult one. Case in point: the People’s Bank of China reducing reserve requirements even as Beijing tried to deleverage Asia’s biggest economy. The move, announced last week, will lop 50 basis points off the amount of capital that banks must hold against loans.

Stacks of containers wait to be shipped abroad at the port of Qingdao in east China’s Shandong province. Photo: AFP / Yu Fangping / Imaginechina

“We think this policy signal suggests the economy likely slowed in June,” says economist Zhiwei Zhang at Pinpoint Asset Management. The step, he says, could be a tacit signal that policymakers don’t like what they’re seeing in vital data series, including retail sales.

On July 12, the China Association of Automobile Manufacturers reported that mainland passenger car sales probably fell 14.9% in June from a year ago. Studying such data, economist Ting Lu of Nomura Holdings can’t help but expect “downward pressure on growth to increase.”

Lu’s analysis team reckons Beijing will accelerate bond issuance moves, after a period of restrained borrowing of just $386 billion in the first half of the year.

Governments, meantime, have less fiscal space than they need as 2022 approaches. Part of the problem, warns Asian Development Bank chief economist Yasuyuki Sawada, is that finances were already strained prior to Covid-19.

Old troubles are coming home to roost: Most governments in the region had not yet unwound the debt accumulated after the 2008 global financial crisis.

“This poses a danger, particularly in light of a decade-long rise in regional debt, primarily private, but some of it public,” Sawada says. In particular, he says, small and medium-sized enterprises “may be susceptible to tightening financial conditions and a worsening economic environment” as the year unfolds.

While the data are still catching up, government debt ended 2020 at 105% of GDP – from 88% in 2019. That’s the highest since World War II.

This puts all economies — from the richest to developing Asia’s weakest links – in harm’s way should the US Federal Reserve and other top monetary authorities tighten credit to tame inflation.

What, then, can be done?

The region’s best economic boost at present would be accelerated vaccinations. Photo: AFP / Jam Sta Rosa

The key to Asia regaining economic momentum is accelerated vaccination schedules, according to International Monetary Fund head Kristalina Georgieva.

She told CNBC last week that “vaccine policy this year, probably next year, is going to be the most important economic policy, and it may beat even monetary and fiscal policy in terms of significance.”

That is easier said than done. Supply constraints, logistical snafus and shortfalls in basic confidence are adding to the headwinds holding back a region that hardly needs any more. Now, Asia may need a bull market in luck to contain bigger losses in the months ahead.