East Asia and Pacific in the time of COVID-19
EAP Chief Economist’s Office
April, 2020
Without public health measures
With public health measures
Days since first case
Health system capacity
1
East Asia and Pacific
Economic Update, April 2020
East Asia and Pacific in the time of COVID-19
• Developing economies in East Asia and the Pacific (EAP) • recovering from trade tensions,
• struggling with a viral disease,
• now face the prospect of a global financial shock and recession.
• The shock could bring growth to a halt and increase poverty.
• This exceptional shock needs an exceptional response• Bold national action,
• Deeper international cooperation,
• High levels of external assistance.
East Asia and Pacific in the time of COVID-19
I. The human costs of COVID-19
II. The economic costs of COVID-191. Nature of the shock
2. Channels of impact
3. Consequences
III. The policy response
I. COVID-19 is inflicting a high human cost
Sources: World Health Organization and the National Health Commission of the People’s Republic of China.
Note: As of March 23, 2020.
COVID-19 has spread rapidly across the world
- and is putting
immense pressure on
public health systems.
Governments must contain the disease and create the capacity to treat its victims
Sources: Imperial College COVID-19 Response team microsimulation prediction under different scenarios.
Suppression measures can help lower the death rate
• Better prepared countries have relied more on testing, tracking and targeted isolation/quarantines.
• Less prepared countries have relied on stringent social isolation measures.
II.1 The economic costs arise from an unusually severe shock
•Social isolation implies both a supply shock and a demand shock, preventing collective high density production, consumption, and face-to-face contact.
•Because depth and duration of the shock is unusually uncertain, it is also becoming a financial shock.
•Unlike previous shocks it is originating not in one country but hitting all countries simultaneously.
Global economic activity is contracting sharply because of demand and supply shocks
Source: Haver Analytics, Institute of Shipping Economics and Logistics.Left Panel. Manufacturing and services are measured by Purchasing Managers’ Index (PMI). Last observation is March 2020. Center Panel. Figure shows 3-month moving averages. New export orders are for manufacturing and measured by PMI. Last observation is March 2020 for new export orders and February 2020 for container shipping.
Global manufacturing and services PMI
(Index, 50+ = expansion)
Global trade
35
40
45
50
55
2018 2019 2020
Manufacturing
Services
44
47
50
53
56
-8
-4
0
4
8
2018 2019 2020
Container shipping
New export orders (RHS)
(Percent change, y/y) (Index)
Declines in investor confidence are leading to tighter financial conditions
Regions spreads
(percent change Jan 2 versus March 27, 2020)
Source: Institute for International Finance, Bloomberg; Institute for International Finance; BIS; Haver Analytics.
Note. 28-days moving average. Includes CHN, IDN, MYS, PHL, THA, VNM. Global Financial Crisis: September 2008; Taper tantrum: May 2013; China stock market volatility: August
2015; Trade tensions: May 2019.
Non-resident net purchases of equity and bonds
The shock is hitting vital global nodes simultaneously
Source: WDR 2020; Comtrade database
17 countries with highest COVID-19 cases
are critical nodes in the global trade network
Economic activity has become more
synchronized since mid-1990s
II.2 Channels: Trade transmits demand and supply shocks to the region
Manufacturing imports
0
25
50
75
Vie
tna
m
Ca
mb
od
ia
Ma
lays
ia
Th
aila
nd
Fiji
Ph
ilipp
ine
s
Mo
ngo
lia
La
o P
DR
Ind
one
sia
Total Manufacturing Imports
Manufacturing Imports from China
Percent of GDP
Manufacturing exports
Source: World Development Indicators; World Integrated Trade Solutions
0
25
50
75
Vie
tna
m
Ca
mb
od
ia
Ma
laysia
Th
aila
nd
Ph
ilipp
ine
s
Ind
one
sia
La
o P
DR
Mo
ngo
lia Fiji
Total Manufacturing Exports
Manufacturing Exports to China
Percent of GDP
Tourism and remittances also channel shocks to the region
0
10
20
30
40
Tim
or-
Leste
Pala
u
Sam
oa
Cam
bodia
Fiji
Vanua
tu
To
nga
Th
ailand
Ma
laysia
Tu
valu
La
o P
.D.R
.
Mic
ronesia
Solo
mo
n Isla
nds
Vie
tnam
Mya
nm
ar
Mo
ngolia
Philip
pin
es
Kirib
ati
Ma
rshall Isla
nds
Ind
onesia
PN
G
Estimated income from non-Chinese tourists
Estimated income from Chinese tourists
Percent of GDP
Remittances dependenceTourism dependence
Source: World Development Indicators; World Travel and Tourism Council Data; Authors’ calculations based on 2012-13 Samoa HIES, 2015/16 Tonga HIES, and 2018 Family Income
and Expenditure Survey for Philippines.
Note: For Samoa and Tonga, share of income from remittances are calculated over total household expenditure, while for Philippines, it is the share of total household income.
87
84
72
76
80
76
77
85
84
0 20 40 60 80 100
< $3.20
$3.20 - $5.49
>$5.50
< $3.20
$3.20 - $5.49
$5.5 - $15
< $3.20
$3.20 - $5.49
$5.5 - $15
Ph
ilip
pin
es
Sa
mo
aT
on
ga
Commodity dependent countries are vulnerable to declining commodity prices
Commodity Prices
Source: CEIC; World Development Indicators; World Travel and Tourism Council Data; World Integrated Trade Solutions
Commodity Exports
4000
4500
5000
5500
6000
6500
20
30
40
50
60
70
80
21
-Dec
24
-Dec
27
-Dec
30
-Dec
2-J
an
5-J
an
8-J
an
11
-Jan
14
-Jan
17
-Jan
20
-Jan
23
-Jan
26
-Jan
29
-Jan
1-F
eb
4-F
eb
7-F
eb
10
-Fe
b13
-Fe
b16
-Fe
b19
-Fe
b22
-Fe
b25
-Fe
b28
-Fe
b2-M
ar
5-M
ar
8-M
ar
11
-Mar
14
-Mar
17
-Mar
20
-Mar
Brent crude oil Cooper (RHS)
USD/barrel USD/Metric tonne
High indebtedness, foreign holdings and foreign denomination of the debt are sources of concern
Debt by sector, selected economies
Source: Institute for International Finance, IMF; World Bank.
Total debt
-50
0
50
100
150
200
250
300
MN
GC
HN
MY
SV
NM
TH
AK
HM
PH
LID
NM
MR
PN
GW
SM
VU
TF
JI
TO
NS
LB
TL
S
East Asia Pacific Islands
Domestic Debt 2018External Debt 2018Total Debt 2007Total Debt 1997
Percent of GDP
0
50
100
150
200
250
300
350
2007
2019
2007
2019
2007
2019
2007
2019
2007
2019
China Malaysia Thailand Philippines Indonesia
Nonfinancial corporate debt
Financial corporate debt
Public debt
Household debt
Percent fo GDP
III.3 Consequences: China saw a precipitous decline in economic activity, but production is recovering
Source: Haver Analytics
Industrial production
-15
-10
-5
0
5
10
Ma
r-18
Apr-
18
Ma
y-1
8
Jun
-18
Jul-1
8
Aug-1
8
Sep-1
8
Oct-
18
Nov-1
8
Dec-1
8
Jan
-19
Fe
b-1
9
Ma
r-19
Apr-
19
Ma
y-1
9
Jun
-19
Jul-1
9
Aug-1
9
Sep-1
9
Oct-
19
Nov-1
9
Dec-1
9
Jan
-20
Fe
b-2
0
Ma
r-20
Percent
-8
-6
-4
-2
0
2
4
6
8
2019q1 2019q2 2019q3 2019q4 2020q1
Percent
Gross domestic product
In all countries, growth is forecast to decline sharply in the region in 2020
Source: World Bank. World Bank staff calculations.
Notes *Myanmar growth rates refer to the pre- and post-pandemic period for fiscal year from October to September. Baseline refers to a scenario of severe growth slowdown followed by
a strong recovery. Lower case refers to a scenario of a deeper contraction followed by a sluggish recovery. Weighted averages are calculated for developing EAP
COVID-19 will undermine efforts to reduce poverty
Number of poor expected to be lifted out of poverty in 2020 under alternative scenarios
Source: World Bank East Asia and Pacific Team for Statistical Development.
Notes: Poverty rate measured using a poverty threshold of US$5.50 per person per day (2011 PPP).
Developing EAP excluding ChinaChina
Households linked to affected sectors face a higher risk of falling into poverty …
Source: Projections based on Vietnam Living Standard Survey, China Household Income Project, and 2015/16 Tonga Household Income and Expenditure Survey data. For China, total household
incomes and consumption levels are extrapolated to 2018, based on the reported growth rates of per capital household disposable income and per capita household expenditure between 2013 and 2018,
as reported in 2019 China Statistical Yearbook (National Bureau of Statistics).
Note: Estimated poverty impacts of income shocks in selected sectors in Tonga, Vietnam and China poverty rates measured using a poverty threshold of US$5.50 per person per day (2011 PPP).
0
20
40
60
80
Fo
od, a
ccom
., t
ourism
,tr
ansport
Whole
sa
le &
reta
il
Mfg
(excl. t
extile
s)
Te
xtile
, costu
me, le
ath
er
To
urism
, fo
od
and a
cc.,
tra
nsport
Whole
sa
le &
reta
il
Ma
nufa
ctu
ring
To
urism
, fo
od
,acco
mm
od
ation
Tra
nsp
ort
Rest o
f econ
om
y
Tonga
Baseline Poverty Rate
50% income loss - 1 quarter
50% income loss - 2 quarters
Vietnam China
Poverty rate, percent
… as do those in the informal and agricultural sectors
Source: WDI based on ILO.
Note: Informal employment includes unregistered and/or small-scale private unincorporated enterprises, including self-employed such as street vendors, taxi drivers and home-based
workers that produce goods or offer services for sale or barter. Informal employment statistics are not available for Papua New Guinea, Solomon Islands and Vanuatu. Employment
in agriculture is the ILO modeled estimate
Employment in agriculture
(% of total employment)
Informal employment
(% of total non-agricultural employment)
79
76
76
55
54
51
31
21
0 50 100
Myanmar
Indonesia
Lao PDR
Vietnam
Timor-Leste
Thailand
Mongolia
Samoa
68
67
61
61
50
50
39
30
30
29
5
0 20 40 60 80
Lao PDR
Papua New Guinea
Solomon Islands
Vanuatu
Timor-Leste
Myanmar
Vietnam
Thailand
Indonesia
Mongolia
Samoa
Source: Staff illustrations based on Gourinchas (2020)
Flattening the recession curve through
macroeconomic policies is the second objective
III. Policy: COVID-19 requires an integrated and intertemporal policy response
Flattening the pandemic curve through
containment policies is the first objective
Without public health measures
With public health measures
Number of cases
Days since first case
Health system capacity
With accompanying macro measures
Without accompanying macro measures
Time since first case
Severity of the recession
As the government chooses optimal strategy, information from testing can ease tradeoff between health and economic benefits
Economic benefits
Health benefits
Strict suppression
Full employment of the healthy
Without testing
Withtesting
Complete shutdown
Desired level of suppression
Partial shutdown
The new tool-kit for macroeconomic and financial policy: prevent a temporary shock from having permanent effects
21
Challenges and Needs Selected Responses So Far
Households
Smooth consumption: Loss of jobs and income
(including remittances); loss of wealth amid asset
price collapse; need to cover basic expenses, and
service debt
Paid sick and family leave, wage subsidies, unemployment
benefits, debt relief and moratorium on utility bills for
distressed households, cash transfers, in-kind vouchers, and
simplified administrative requirements for benefits
Firms
Avoid bankruptcy: Loss of revenues and access to
capital (including FDI); need to pay employees, cover
basic expenses, and service debt; need to moderate
liquidity pressures that could turn into solvency
pressures
Loan guarantees, deferral of tax and social contributions, debt
relief for distressed borrowers, import duties waived on
selected imports, and subsidies to maintain employment
Financial
institutions
Avoid financial instability: Loss of funding access
and deterioration of credit portfolio; need to pay
employees, cover basic expenses, and service debt
Monetary policy rate cuts and asset purchases, targeted
lending facilities, lower reserve requirements, swap lines for
dollar liquidity, regulatory forbearance and flexibility, changes
in capital flow management measures, and postponement of
planned regulatory changes
•The optimal economic policy response too will change over time and depend on the precise nature and evolution of the shock—to labor supply, aggregate demand or finance.
•Standard stimulus may be less effective than usual because some sectors are shut down, muting the Keynesian multiplier:• Propensity to consume low
• Elasticity of supply (social distancing and supply chain disruptions
•But supply shocks can trigger changes in aggregate demand larger than the shocks themselves.
How far must fiscal and monetary policies be recast in a COVID-19 mold?
• Help households to smooth consumption through easier access to credit
• Help firms survive the disruption through easier access to liquidity.
• But regulators must ensure risk disclosure and clearly communicate supervisory expectations to avoid financial instability, especially in economies with high levels of private indebtedness.
• Intervention should be accompanied by measures that ensure that financial institutions retain all residual resources to shore up capital -not distribute them as dividends and share buybacks or as bonuses to management.
Easing financial conditions to help households and firms cope
Targeted support for firms
• Crises do not catalyze creative destruction. Support is needed to promote survival of productive firms, minimize downturn and facilitate recovery.
• Try to protect worker and firm relationships where the match has value by helping firms maintain employment
• Cash grants can SMEs survive and wage subsidies speed up firms’ recovery
• Directed credit may not reach the smallest firms
• In the informal sector firms and workers are harder to trace and forcing firms to formalize may not lead to longer term benefits• Focus on providing direct assistance to informal workers
Relying on existing schemes is preferable: it’s easier to scale up than set up
• Tailor support to the type of firms and risks.• Formal firms:
• Against liquidity risk: credit lines, tax deferrals etc. They can be broad-based measures.
• Against solvency risk: short-time work or wage subsidies, subsidized loans, cuts in turnover-based taxes. Fiscal considerations impose that transfers should be targeted, for example only for most affected and systemically important industries. Sunset provisions to be included to limit moral hazard.
• Informal firms: • where social cash transfer systems already exist, consider increasing transfer amounts, easing
eligibility criteria and making them unconditional;
• where social cash transfer systems don’t exist and administrative capacity is weak, consider subsidizing utility (or other basic spending items’) bills
• Support could be conditional on preserving jobs and not being tunneled to management or shareholders
Trade policy must stay open
• One immediate contribution could be to help expand the supply of key medical products by facilitating public-private partnerships .
• The response must include financing, policy advice and technical assistance to help countries cope with the health and economic impacts of the pandemic. The World Bank Group is rolling out a $14 billion fast-track package and will deploy up to $160 billion over 15 months to protect the poor and vulnerable, support businesses, and bolster economic recovery.
• 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.
The international community must provide support to combat pandemic and mitigate consequences
