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The ASEAN region’s economy contracted by more than many emerging markets in 2020, and these 10 Southeast Asian nations will likely rebound by less in 2021. Coronavirus has derailed not only short-term growth but will curtail longer-term potential output.

The virus continues to spread in much of the region – with fresh restrictions imposed at the start of 2021 in places like Indonesia and Thailand. A full recovery is impossible until the pandemic is fundamentally addressed, which means effective vaccination programmes.

Governments appear to have secured vaccines for most of the region’s population, including Chinese and Russian products, but delivery times vary widely. Only Singapore is likely to inoculate a large share of its population in 2021: other roll-outs will be much slower. Herd immunity is unlikely before next year.

Partial inoculation should allow governments to lower lockdowns and other restrictions but consumer confidence will take time to recover. Thailand, expected to inoculate only a minority of its population this year, should see tourism continue to suffer.

Historically, exports have led regional economies out of crises. Home-working and health requirements in developed countries have helped ASEAN’s electronic and pharmaceutical sectors and we expect the semiconductor cycle to remain strong in 2021. Commodity exports bounced back too.

Industrial production and exports thus grew sharply last year in Vietnam – the only country showing GDP growth in 2020 – and Singapore, with Malaysia selling electronics and rubber gloves abroad.

There is broad political consensus in ASEAN for accelerating infrastructure development. Governments – especially in Indonesia, the Philippines, Malaysia, and Thailand – have earmarked additional funds to finance the post-pandemic investment recovery.

Foreign direct investment into Southeast Asia has held up relatively well compared to other places and the recently-signed RCEP trade agreement should provide further gains for the region. And despite a deceleration in outbound Belt & Road investment, private Chinese investment in ASEAN is booming, especially in Indonesia and Malaysia.

Most countries used fiscal-stimulus to counter the pandemic’s effects. Budget deficits should remain high in 2021 but support will pivot from short-term measures such as wage subsidies to infrastructure that propels the eventual investment recovery. Deficits are unlikely to return to pre-COVID-19 levels before 2023.

Countries also employed quantitative easing, but we expect only Indonesia and Malaysia to cut interest rates further this year and a tightening cycle across the region is likely in 2022. Deflationary pressures in 2020 mitigated the risks of such policies but even if demand inflation remains subdued in 2021, food and energy prices are rising.

On the political front, the new US president may show increased interest in Southeast Asia during a time when mainland China’s trade and investment links with ASEAN continue to flourish. Delicately balancing the relationship with both Washington and Beijing is a key challenge for the region’s policymakers – but is crucial for ensuring its long-term prosperity.

First published 11 January 2021.

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