The impact of COVID-19 looms large over South-East Asia’s economy, with each country’s response determining its prospects for the year ahead. Despite the gloom of recent months, there are still bright spots in the region and reasons to be optimistic in 2021.

Economists had to work harder than usual in 2020, with their forecasts needing to be revised and new updates released. In South-East Asia, as fresh information rolled in about restrictions easing, tourism resuming and a vaccine rolling out, economists have continued to debate whether the recovery in 2021 will follow a L, U, V or swoosh shape. Given the diversity of the region, the prospects of individual countries are mixed, but overall there are reasons to be cautiously optimistic about the outlook for the year ahead.

Vishrut Rana, an economist at S&P Global Ratings, expects a gradual recovery for South-East Asia in 2021 along with a gradual normalisation of consumer spending and business activity. However, the Association of South-East Asian Nations (ASEAN) region is still some way from normalisation: “We expect that ASEAN’s economic output will reach pre-Covid levels only by the third quarter of 2021,” Rana tells Treasury Today Asia.

In December 2020, the Asian Development Bank (ADB) revised its forecasts from September and South-East Asia’s figures had a larger contraction than originally predicted: the estimate for 2020’s growth was revised down to -4.4% from -3.8%. The forecast for 2021 was also downgraded, with the region now expected to grow 5.2%. The ADB noted that South-East Asia remains under pressure as COVID-19 outbreaks continue, particularly in Indonesia, Malaysia and the Philippines.

There is hope on the horizon, however, since the first vaccination took place in the UK in December 2020. Ricky Kaura, Head of Transaction Banking, Asia Pacific, Africa and Middle East at Standard Chartered, comments that news of the vaccine has added to the optimism for the year ahead. “The downside growth risk is now lessened,” he says. “One of the key challenges will continue to be pandemic management, as a widespread application of vaccines will take time,” he adds.

ASEAN’s recovery will hinge on the ability of individual countries to contain the virus, says Debopama Sen, Head of Citi Treasury and Trade Solutions, Singapore and ASEAN. “In the near term, the spread of the virus remains a concern,” she says. “In the area of trade, recovery in ASEAN will likely be uneven as the different countries are managing different challenges corresponding to how the pandemic is impacting their home markets and export demand,” she adds.

The pandemic has also highlighted the differences in the underlying economies in South-East Asia, with some countries being more open than others, and more dependent on trade and international travel. In the case of Indonesia, for example, its large domestic economy of approximately 270 million is less reliant on the external market, compared to Thailand, which is a major tourism destination. Thiam Hee Ng, Principal Economist of the South-East Asia Regional Department at the ADB, says Thailand received substantial support from its government — more so than Indonesia or the Philippines — because it had greater resources available. This, however, was not enough to stave off an economic contraction because the country is so dependent on tourism.

The Philippines, like Thailand, has also suffered because of the dramatic drop in international visitors because of COVID-19-related travel restrictions. The economy in the Philippines, however, does not rely on tourism to the same degree as Thailand. Instead, the country relies heavily on remittances from its overseas workers sending money home. Many of them have been on the frontline in fighting the pandemic — the nurse giving the world’s first COVID-19 vaccination in the UK was from the Philippines,— but many others, such as those working on cruise ships, for example, have had to return home, says Ng. This has yet to be reflected in the remittance figures, however, as inflows to the Philippines would have received a boost as those workers would have wired home their entire savings before heading home, Ng points out.

Malaysia likewise has been affected by the drop in tourists, but its economy is more diversified. As a major exporter of rubber, it has fared the pandemic well. “There has been huge demand for rubber gloves,” says Ng. “Next year should pick up for Malaysia and we expect Malaysia to have the strongest growth next year,” he adds.

And of the countries in the region, Vietnam is the bright spot. “Vietnam handled Covid the best,” says Ng, adding that unlike other economies, it actually experienced growth and not a contraction. The country has a large manufacturing industry and “Vietnam was able to keep producing because it had contained Covid,” explains Ng. “Next year Vietnam will continue to grow and expand,” he adds.

Sen at Citi agrees: “Vietnam has been the shining star in ASEAN with its effective coronavirus containment, which has helped prop up the domestic economy.” She adds how, prior to the pandemic, Vietnam already had a lot going for it: it is pro-business, has a liberal investment environment and benefits from multiple free trade agreements. “Even before the pandemic, a number of multinational firms had relocated parts of their supply chains to Vietnam as part of their diversification strategies,” she says, adding that she expects this trend to accelerate.

Rana at S&P Global Ratings is also positive about the outlook for Vietnam, “Vietnam stands out as a potential outperformer in 2021. The economy is benefitting from a strong performance from its electronics sector, which will continue to support growth next year.” Like Ng, he also is positive about Malaysia’s prospects for the year ahead. He adds, “Malaysia is another economy that could see a brisk recovery, as the economy has weathered the deep downturn so far. However, the ongoing escalation of the pandemic is weighing on economic prospects for the first quarter of 2021.”

The business sentiment of executives on the ground in South-East Asia broadly mirrors the economists’ projections. McKinsey conducted a mass survey of thousands of executives every six weeks from June 2020 asking them when they expected the economy to return to pre-COVID-19 levels (ie Q4 2019) in the country where they are based. The survey results, which were released in October 2020, mapped out nine scenarios of the impact of COVID-19 on the economy. These scenarios considered the degree to which the virus had spread, and the effectiveness of the public health response as well as economic interventions. The executives in ASEAN mostly opted for the scenario McKinsey dubbed ‘A1’. Of the ASEAN executives polled, 40% chose this A1 scenario, which expected to see a localised recurrence of the virus, with an effective public health response, and a partially effective economic response. In the A1 scenario, growth would accelerate in the second half of 2021 and would return to pre-COVID-19 levels in the fourth quarter of 2021. The figure of 40% of ASEAN executives choosing this option is roughly in line with business sentiment elsewhere: 36% of global executives also chose the same scenario as the most likely path for their economy.

Looking beyond the effects of the pandemic, there are other features of the region that give executives on the ground reason to be optimistic. Vijay Shankar, Head of Transaction Banking, ASEAN and India at ANZ, says that Singapore, Vietnam and Thailand in particular are bright spots in South-East Asia. They have all effectively contained the virus, he says, and they also show promise because companies have diversified their supply chains to these markets, and also set up treasury centres there.

This is a trend that Kaura at Standard Chartered also sees. “We see many of our clients focused on establishing regional centres to manage treasury transformation as well as centralised supply chain management.” Kaura adds that many companies are also entering ASEAN markets because of their favourable demographics — a demographic dividend of a relatively young population that provides both a workforce and a large consumer market.

We expect that ASEAN’s economic output will reach pre-Covid levels only by the third quarter of 2021.

Vishrut Rana, Economist, S&P Global Ratings

Of the sectors that are expected to do well in 2021, Rana at S&P Global Ratings notes that both financial services and technology have favourable outlooks. “The technology sector has performed well through the downturn. Demand for technology and electronics products, such as cloud services and consumer electronics, has remained resilient and has benefited from increased remote work globally. We expect technology demand to remain steady over the next year,” Rana says.

Shankar at ANZ says, “We are already seeing that the COVID-19 situation has given digital services industries like e-commerce, e-wallets, gaming and entertainment, semi-conductor-based electronic industries, pharma and auto ancillary a large boost, and expect the growth to continue post-pandemic.”

The internet economy is another bright spot for ASEAN, says Citi’s Sen. “From food delivery, education, healthcare, remote work, entertainment, shopping to banking, technology has been the backbone keeping our society functional during times of lockdowns and quarantines.” Since the beginning of this year, 40 million people in South-East Asia have connected to the internet for the first time. This is compared to a year ago at ten million. And of those new digital consumers, nine out of ten plan to keep using at least one digital service beyond the pandemic. “Suffice to say, a silver lining that has emerged in 2020 and beyond is the acceleration of digital adoption, both by consumers and businesses,” Sen says.

Of the industries that have the brightest prospects, Kaura says: “We would see consumption-based industries continuing to benefit, including fintech, e-commerce, healthcare, insurance and technology likely being stronger growth industries in 2021. Countries that have the existing base for these industries will see their businesses growing, not just in their countries but also the opportunity for the expansion to other less-ready jurisdictions.” Kaura adds, “We anticipate emerging ASEAN advancing as a manufacturing hub, potentially attracting new investments in labour-intensive manufacturing.”

Another positive development for the region, which the transaction bankers point to as another bright spot, is the development of real-time payments which are set to underpin further innovations in the region. “Today most of the major ASEAN markets have advanced real-time payments schemes with added features to enable digital commerce, and others are not far behind,” says Sen at Citi. She estimates that by 2025 digital payments will account for almost one in every two dollars spent in the region. This has come about because the governments across ASEAN have committed to digitising their economies, which in turn has created opportunities that will help drive economic recovery, she says.

Shankar at ANZ also notes the important development of the acceleration of real-time payments implementation across the region. “A number of countries including Myanmar, Thailand, Philippines are positioned to push the digital agenda and shape how we do business going forward,” he says.

Many are looking ahead to a post-COVID-19 environment, where the building blocks of a digital economy are developed so that South-East Asia can thrive. For now, however, the region is very much focused on managing the pandemic. “Overall, 2021 is projected to be a bounce-back year for ASEAN. However, recovery is likely to be uneven, and will hinge on the ability of countries in ASEAN and beyond, to contain the virus,” says Sen at Citi.