Covid and Southeast Asia: Not as Bad as it Looks

Crude prices, the other major component of the crisis, will save some economies

Markets are awash with scare stories generated by the Covid-19 crisis about so-called emerging markets, their currencies and their debts, some of which are justified but as far as much of Asia is concerned are barely supported by facts.

See how currencies have tumbled against the US dollar since the start of 2020. But now look at the realities of their external accounts and how they will be impacted by the combination of the general collapse of global demand and the fall in oil prices.

The latter is a consequence both of the Coronavirus and the Saudi/Russia abandonment of production cuts to keep prices around $50 a barrel. This was originally seen as a war between those two exporters, which it may be, but both have another aim – to kill off as many US shale producers as they can. Few shale operators, many highly leveraged, can survive for long with prices below $45. Today Brent Crude is at US$28.72/bbl.

This has a political as well as economic objective for Russian President Vladimir Putin, who delights in exploiting Trump’s naivete and the discomfort of his Texas oil patch friends.

The regional currency losses against the US dollar since the start of 2020 are as follows:

  • Japanese yen, New Taiwan dollar, Philippine peso: 1 percent

  • Chinese renminbi, 2 percent

  • Korean won and Malaysian ringgit 6 percent

  • Thai baht and Indian rupee 8 percent

  • Singapore dollar, Australian dollar and Indonesian rupiah 16 percent

These moves to some extent reflect the degree of openness of the markets, Thus the Australian dollar and the Indonesian rupiah have been traditionally very volatile, with central banks unwilling to try to do more than moderate daily movements compared with the NT$ and Thai baht and also the extent of private sector foreign debt But they do reflect too a wide range of interpretation of the relative impact on the external accounts of regional economies

For foreign investors, these falls have added to the declines of the various stock markets, all down by 25-35 percent with the foreign Exchange Traded Funds (ETFs) leading the packs of rats leaving the supposedly sinking ships.

But look first at the impact of the oil price. Every country in the region bar Brunei (and perhaps Singapore via its oil support and refining industries) is a net beneficiary, in some cases dramatically. Top of the list is the Philippines. Oil accounts for a major portion of its imports, and even more if one excludes imports for export processing. India – indeed the whole subcontinent – is another huge winner, Thailand also. Even Indonesia is a net beneficiary as, to a smaller degree is Malaysia. The latter two are gas exporters but mostly under long-term contracts which are not affected in the short to medium terms.

On the debit side for the region is the collapse of tourism, a particular problem for Thailand, Malaysia and Singapore and to a lesser degree Philippines. But even tourism has a high import content so the net impact on the current account is less than it might seem. It is marginal for India and Indonesia apart from Bali.

Other service earnings – business processing – is hugely important for India and the Philippines and seem unlikely to be much affected, at least in the near term, by global recession. The same applies to remittances, crucial for the Philippines but also for India and in lesser ways other countries including Indonesia, Myanmar and Cambodia.

Though difficult to forecast, remittances seem likely to be sustained for now. Some decline had been expected at the time of the of 2008-9 crisis but growth merely slowed.

The main problem for the region lies with merchandise exports. Prices of most metals have fallen sharply which will hurt the region’s copper and nickel producers, Indonesia and the Philippines. But agricultural prices have mostly seen only small, if any, falls. Rice, imported by the Philippines and Indonesia but exported by Thailand, Vietnam and India, has been stable. Coffee is down by about 5 percent and prawns stable. Given the currency movement, the changes to producers have been quite stable overall.

Coal, important for Indonesia, is also down. But tree crops have suffered much less. Despite a 15 percent fall, palm oil is still above year-ago levels and rice and tapioca have been quite stable.

The much bigger problem is foreign consumer demand for textiles and garments and consumer electronics. Bangladesh and Cambodia are especially vulnerable to the collapse of non-essential buying in the west. Vietnam will also feel the pinch though its newer IT-related manufacturing should be less affected – though the longer the lockdowns last the wider and deeper the demand collapse will be.

Almost all manufactured exports are destined to see big declines due to weak demand, whether garments, consumer electronics or cars. But the fall in consumer demand is global so there will also be a sharp fall in imports, particularly of non-essentials and also of capital equipment as lock-downs inhibit investment and government resources diverted from infrastructure building to unemployment relief.

Longer-term there is also the threat that supply chains will be shortened even at the cost of efficiency. Western countries are beginning to see this as a potential benefit – a typically selfish and short-sighted view given that if they cannot create income from making garments, etc they will be unable to buy capital goods and smartphones.

Meanwhile, however, the danger of financial collapse as in 1998 as a result of foreign debts and collapsing currencies seems unlikely. Thailand and Malaysia will see their current account surpluses diminish or even disappear but that is not a crisis. Vietnam had a strong pre-crisis position which will be only gradually eroded. Indonesia’s current account deficit is was not a major concern before and the rupiah fall is, as in the past, likely to see sharp falls in imports, perhaps greater than export declines.

As for the Philippines, the chaotic situation created by ill-planned and implemented lockdowns is causing port and logistics chaos but as the stable currency indicates that hurts the masses more than the external finances.

Globally, the disruption of trade is simply compounding the losses of domestic economies through lockdowns which drastically cut employment and demand. Policies driven by focus on the virus to the exclusion of overall welfare are causing increasing misery and will saddle all countries with debts to be repaid. But in the medium to long term, the biggest sufferers will be the oldest and currently most advanced, and indebted, states.