The COVID-19 Delta variant is spreading worldwide but has had a particularly severe impact on South-East Asian countries. Stringent lockdowns have hit manufacturing and consumption, causing HSBC to reduce 2021 GDP growth forecasts across all the region’s major economies except Singapore.

Vaccination rates are lower than in the developed world and the rest of Asia. Singapore and Malaysia are the only countries in ASEAN – the Association of South-East Asian Nations – likely to reach 70 per cent coverage in 2021.

There is little hope for Indonesia, Vietnam, Philippines and Thailand reaching 70 per cent until 2022. Moreover, they are using a large array of vaccines with differing levels of effectiveness against the Delta variant, so people there could remain vulnerable to the current outbreak and any future mutations.

Uncertainty about the virus’s future trajectory is making governments formalise their approach to lockdowns and restrictions. Given that the impact of restrictions will largely fall on domestic consumption, this alone explains most of our forecast changes.

Vietnam and Malaysia have imposed their most stringent lockdowns with some manufacturing significantly disrupted, especially Vietnam’s large electronics and textile sectors. Indonesia has imposed its toughest restrictions since the start of the pandemic, but the impact on mobility, and thus growth, has been softer than expected and there could be further tightening.

However, despite the restrictions and mobility reductions, consumption should be more resilient now because of growing e-commerce penetration and quicker disbursement of fiscal support.

We have reduced our 2021 GDP growth forecast for Malaysia from 4.1 per cent to 3.6 per cent with Vietnam cut from 6.1 per cent to 5.1 per cent. Our 2021 GDP growth estimate for the Philippines falls from 4.8 per cent to 4.5 per cent and for Indonesia from 4.0 per cent to 3.5 per cent with Thailand lowered from 2.1 per cent to 1.3 per cent. Our Singapore forecast is unchanged at 6.5 per cent but while 2022 growth will be higher in other countries – though no higher than we previously expected – we still see Singapore’s growth falling to 3.5 per cent next year.

Inflation concerns in Southeast Asia have dissipated. Key food prices have fallen sharply – rice is down 30 per cent this year – helping to offset rising energy prices. Meanwhile, demand-driven inflation has subsided sharply.

We do not expect further rate cuts. Instead, fiscal policy remains the main line of defence, but our projected 2021 budget deficits have risen in Malaysia and Thailand with the Philippines gap increased to 9.4 per cent of GDP, potentially threatening credit ratings.

ASEAN’s recovery prospects thus depend, to a great extent, on future vaccination trends, export composition and fiscal policies. Singapore and Malaysia look best positioned, but Thailand and the Philippines have a long road ahead.

First published 2nd August 2021.

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