East Asia and the Pacific in the Time of COVID-19 – Regional Economic Update, April 2020

Key Recommendations

1. Adjust both health policies and macroeconomic policies. To prevent the spread of infection, many governments are taking transmission control measures like lockdowns and travel bans to “flatten the pandemic curve”. In parallel, to mitigate the resulting adverse economic impact, governments are taking monetary, fiscal and structural measures to “flatten the recession curve”. In addition, early investments in health can reduce the need to take costly preventive measures when epidemics strike. For example, countries like Singapore and the Republic of Korea seem to have benefitted from high levels of testing, tracking, and quarantines.
2. Urgently boost health care capacity to meet what may be an overwhelming demand for a sustained period. Apart from expanding conventional health care facilities and medical equipment factories, innovative measures are likely to be needed such as converting ordinary hospital beds for ICU use and rapidly training people to work in basic healthcare. Ensuring adequate access for the poor may require the provision of free or subsidized testing and treatment.
3. Adjust fiscal and monetary policy to meet the COVID-19 crisis. Expansionary macroeconomic policy cannot do much to increase production and employment during periods when workers are obliged to stay at home. Instead, fiscal measures should support the public health response, provide social protection to cushion against shocks, especially for the most economically vulnerable. For example, subsidies for sick pay and expenditure on health care could alleviate distress and help support containment. Expanded safety nets could provide temporary relief to families whose earnings have been adversely affected by the outbreak. School feeding and other support to students during school closures, as well as employment support to help workers reintegrate into the economy after the outbreak has abated, would ensure that temporary deprivation does not translate into long-term losses of human capital. Similarly, liquidity injections can help firms stay in business and maintain beneficial links to Global Value Chains (GVCs).
4. In the financial sector, ease access to credit for households to ease hardships and smooth consumption, and ease access to liquidity for firms to help them survive the current disruption. At the same time regulators must ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially in economies with high levels of private indebtedness. For poorer countries, debt relief will be essential, so that critical resources can be focused on managing the economic and health impacts of the pandemic.
5. Trade policy must stay open. To retain the production of essential supplies for domestic consumers, several countries have imposed restrictions on exports of medical products. Economics and recent experience show that these measures ultimately hurt all countries, particularly the more fragile.
6. In all of these areas, boost international cooperation and develop public private partnerships, particularly to ensure the supply of key medical products.  All countries must recognize that, in addition to bold national actions, deeper international cooperation is the most effective vaccine against this virulent threat.

Key Findings

Following the spread of COVID-19 and increased financial volatility, the growth outlook for the region in 2020 has been sharply downgraded.

• In a rapidly changing environment, making precise growth projections is unusually difficult. Therefore, the report presents both a baseline and a lower-case scenario.
• Growth in the developing EAP region is projected to slow to 2.1 percent in the baseline and to a negative 0.5 in the lower case scenario in 2020, from an estimated 5.8 percent in 2019. Growth in China is projected to decline to 2.3 percent in the baseline and 0.1 percent in the lower case scenario in 2020, from 6.1 percent in 2019.
• Growth in EAP excluding China is projected to slow from 4.7 percent in 2019 to 1.3 percent in the baseline scenario and negative 2.9 in the lower-case scenario in 2020, and is projected to rebound gradually in 2021 as the effects of the virus dissipate.

China has seen a precipitous decline in economic activity.

• In February, the purchasing managers' index fell below the 50-point mark that separates monthly growth from contraction. The fall was sharper and wider than during the great recession, to 36 in manufacturing and 30 in non-manufacturing. Industrial production also registered negative growth for the first time in more than 30 years.
• It remains to be seen whether the government can switch on economic activity as abruptly as it was switched off. Many large industrial enterprises are reported to have resumed production, even though many small and medium enterprises are still struggling. Indirect estimates, such as pollution indicators, show that activity is increasing only gradually in China.

The COVID-19 shock will also have a serious impact on poverty reduction across the region.

• The report estimates that under the baseline growth scenario, 24 million fewer people will escape poverty across the region in 2020 than would have in the absence of the pandemic (using a poverty line of USD5.50/day).
• If the economic situation were to deteriorate further, and the lower-case scenario prevails, then poverty is estimated to increase by about 11 million people.
• Prior projections estimated that 35 million people would escape poverty in the region in 2020, including over 25 million in China alone.

Households linked to economic sectors affected by COVID-19 will face a substantially elevated risk of falling into poverty, at least in the short-run.

• These sectors include tourism and retail in Thailand, and manufacturing and textiles in Vietnam
• Informal workers in all countries are especially likely to suffer and will be the hardest to help.

Financial systems across the region remain vulnerable to external shocks, especially in countries with high private sector debt.

• The rate of increase in China, Indonesia, Malaysia, Philippines, and Thailand (EAP-5) debt has been much faster than the rate of increase for the rest of the world so that EAP-5 share of total global debt increased from 3.4 percent in 2005 to 18 percent in 2019.

Other country-specific circumstances have weighed on the outlook.

• All countries in the region sharply downgraded their growth forecasts, largely reflecting the effect of the spread of the disease. Country-specific factors, such as droughts (Thailand), and commodity shocks (Malaysia and Mongolia), also weighed on the outlook.

In the Pacific Island countries, the outlook for 2020 is subject to substantial risks due to their economies’ reliance on grants and tourism.

• A worsening in the COVID-19 pandemic and/or more severe/prolonged travel restrictions would have further negative impacts on tourism activity.