RaboResearch - Economic Research

How COVID-19 will impact ASEAN: Deep recessions and a weak recovery



Co-author: Ralph van Mechelen during his rotation at RaboResearch

  • ASEAN countries’ success in fighting COVID-19 is mixed
  • Most ASEAN countries have implemented strict containment measures by now
  • The lockdown measures, weak exports and a drop in tourism will cause deep recessions in most of ASEAN this year
  • In a downward risk scenario, we foresee double-digit GDP contractions
  • Weak external demand, continued social distancing and weak consumer sentiment will hold back the recovery in 2021
  • We thus expect the recovery to be modest rather than grand
  • Fiscal stimulus to fight the crisis will leave governments with higher public debt and increased debt servicing costs
  • Policy rates have been cut across the board this year, and we expect more cuts to come
  • Indonesia’s central bank has started experimenting with unconventional monetary policy, and we think more ASEAN central banks will follow
  • Non-performing loan ratios will rise, hurting banks’ profitability
  • ASEAN currencies will weaken again substantially in the short term

Mixed success in fighting COVID-19

The success of fighting COVID-19 within ASEAN is quite mixed.[1] There appear to be two groups: (Figure 1), one that is still seeing a rise in new cases (Indonesia, the Philippines and Singapore) and one that seems to be “flattening the curve” (Vietnam, Thailand, the Malaysia). However, there are caveats to be made even for the latter group since these countries are not testing many people for the virus (Figure 2). The risk for these countries is that they will see more bouts of rising cases and will have to reinstate containment measures. Although the case of Singapore (which reacted very swiftly to the crisis and has done extensive testing) shows that even with a relatively sound policy reaction there is no guarantee to fully contain the virus.

Given the situation as it stands, we estimate that most ASEAN countries will face deep recessions this year. These estimates assume that the virus will not spiral out of control and overwhelm healthcare systems. For some countries there is a clear risk of that happening. Indonesia is a case in point. Its government has done little testing and implemented relatively loose containment measures, while its healthcare system is weak. If the virus spirals out of control in Indonesia and the government is forced to implement stricter or longer containment measures down the line, the economy will be hurt more and we will have to revise our forecast.

However, for now, we think Vietnam and Indonesia might still see modest growth this year, while Thailand, Singapore, the Philippines and Malaysia will see a sharp contraction.

Figure 1: Curves are flattening in some countries, but rising in others
Figure 1: Curves are flattening in some countries, but rising in othersSource: Macrobond, WHO
Figure 2: And there is also a big difference in the amount of testing
Figure 2: And there is also a big difference in the amount of testingSource: Our World in Data, Oxford University

Very deep recessions in most of ASEAN

The economic impact of COVID-19 on ASEAN economies will predominantly be felt through three channels: i) exports, ii) tourism and iii) domestic demand. Given that we expect global GDP to decline by almost 3% in 2020 and since tourism has ground to a halt, we expect Singapore and Vietnam to be hit hardest in terms of exports (Figure 3), and the Philippines and Thailand to be  hit most in terms of tourism (Figure 4). We expect that international tourism will remain depressed until widespread vaccination is possible. Optimistic estimates put this at the second quarter of next year at the earliest[2]. Even assuming the optimistic case, for Thailand and the Philippines, the slow recovery in tourism will hold back their economic recovery in 2021.

Figure 3: Singapore depends the most on trade
Figure 3: Singapore depends the most on tradeSource: Trademap.org, RaboResearch calculations
Figure 4: Philippines depends the most on tourism
Figure 4: Philippines depends the most on tourismSource: WTTC, RaboResearch calculations

The third channel through which COVID-19 will hurt ASEAN economies is domestic demand. The extent to which domestic demand will be hurt depends on how strict and lengthy containment measures in each country are and whether social distancing measures will be implemented after the hard lockdown phase. From that angle, Vietnam and the Philippines will take a relatively large hit, as the containment measures have been the strictest there (Table 1). Of the two, we think the Philippines will be hit harder since Vietnam has been rather successful in containing the outbreak while the Philippines has recently extended its lockdown to June 1st.

Table 1: Containment measures have been most strict in Vietnam and the Philippines
Table 1: Containment measures have been most strict in Vietnam and the PhilippinesSource: Blavatnik School of Government, University of Oxford

Our base case points to deep recessions

The combination of a sharp drop in exports, tourism and domestic demand will lead to deep recessions in most ASEAN countries. Even in our base case, which assumes that the number of active cases will gradually fall, we expect large contractions of GDP growth in 2020 in most countries (Table 2). Moreover, we expect a limited recovery in 2021 because we think that some form of social distancing will stay in place, which will limit economic activity. Indeed, as The Economist so aptly put it, lockdowns will leave behind a 90% economy, which is here to stay until a reliable and widely available vaccine or cure is found. In addition, lingering uncertainty will hurt consumer and producer sentiment, while weak global demand will hold back exports and tourism.

Table 2: Our base case GDP forecasts
Table 2: Our base case GDP forecastsSource: Macrobond (2019), RaboResearch (2020 and 2021)

We think Indonesia’s growth for 2020 will still be modestly positive (0.4%) due to its limited openness and dependence on tourism, combined with a less stringent lockdown. In addition, Indonesia is relatively dependent on oil imports (17% of total), so lower oil prices reduce its import bill. However, we must stress that our estimate depends on the virus not spiraling out of control, which in Indonesia is a clear risk. If that happens and the government still has to implement ‘lockdowns’ we will have to revise our forecast downwards.

We expect Malaysia’s economy to contract by 6% this year. It has adopted relative strict lockdown measures and, on top of that, is a commodity exporter. Oil represents 14% of Malaysia’s exports and comprises almost 20% of the government’s revenue. The latter will also hamper the government’s ability to mitigate the negative economic effects of COVID-19.

The sharp contraction in the Philippines of 5% this year (especially compared to the growth rate last year) reflects the strictness of its lockdowns and its high dependence on tourism. In addition, the Philippines has a relatively high dependence on foreign remittances from its overseas workers. These remittances are about 8% of GDP and are (for a large part) from the Filipino diaspora in the USA.

For Singapore, this year’s contraction of 7% reflects the country’s heavy reliance on trade as a small open economy.

Thailand is expected to face the deepest GDP contraction in 2020 (8%), given its combination of being relatively open, its high dependence on tourism and lingering political instability. The one bright spot for Thailand is that it might be able to benefit from rising tensions between the US and China, as its factory wages and trade basket are comparable to China, something we have argued before (here).

For Vietnam, we expect GDP growth to slow down severely this year to 1%, but still stay positive. Vietnam’s lockdown was strict, but relatively short and the country seems to have contained the outbreak for now. Also, Vietnam might able to benefit from further rising tensions between the US and China as it has low wages and an export basket comparable to China. However, seeing that Vietnam’s trade surplus with the US has already soared since the US-China trade tensions, there is a chance that president Trump might slap tariffs on Vietnam as well, something he has alluded to before.

In addition, we caution that our estimate for Vietnam depends on the virus not spiraling out of control and overwhelming the healthcare system. This is a real risk given Vietnam’s lack of extensive testing and its weak healthcare system. So all in all, even though our GDP growth estimate for Vietnam is the highest, it is also one of the most prone to a potential downgrade.

What if things get worse?

Table 3: In our risk scenario, we foresee double digit contractions
Table 3: In our risk scenario, we foresee double digit contractionsSource: Macrobond (2019), RaboResearch (2020 and 2021)

In a gloomier scenario (so not our base case) in which the virus resurges and countries have to extend or re-install lockdowns, the negative economic effects will be much greater. This is the risk scenario we described in our recent global outlook. In this scenario, global GDP will decline by almost 9% in 2020, global trade will also see an unprecedented decline and overall risk aversion will spike. For ASEAN, these factors will lead to huge capital outflows and declining investments, heavier currency depreciations, a spike in bankruptcies and unemployment, and a significant risk of civil unrest in certain countries (most notably Indonesia and Thailand). Economic contractions will be in the double digits in this scenario (Table 3), with limited recovery in 2021 as consumer-, producer- and investor sentiment will not only decline more deeply but take longer to recover as well.

After the stimulus: higher debt and lower rates

Fiscal stimulus

Most ASEAN governments have introduced fiscal stimulus packages to counter the negative economic effects of COVID-19. These measures include wage subsidies, tax exemptions and in some cases cash transfers. Singapore and Thailand have implemented extensive fiscal stimulus measures, amounting to 13% and 9% of GDP respectively. Measures by the Philippines, Indonesia and Vietnam have been more modest (around 3% of GDP). We do not expect the fiscal measures to support consumption very much, as uncertainty will drive consumers to save any windfall instead of spending it. The same applies to firms, which we think will try to save tax cuts and subsidies rather than spend on investments.

Figure 5: Fiscal stimulus and weak growth will lead to an increase in public debt
Figure 5: Fiscal stimulus and weak growth will lead to an increase in public debtSource: Macrobond, RaboResearch calculations

We estimate that the combination of fiscal measures and GDP contractions (which lower government revenue) will lead to sizable increases in public debt across ASEAN (Figure 5)[3]. For Malaysia, which also faces a significant drop in government revenue due low oil prices, the rise in public debt might force the government into fiscal austerity after the crisis.

In any case, interest costs will become a larger part of government expenditures. This will not only be the case for countries with high public debt such as Malaysia, but also for those that have to pay high interest rates to borrow money from the capital market, such as Indonesia (Figure 6). Increases in public debt and overall risk aversion will push these borrowing costs higher. The result will be that ASEAN governments have to spend a larger part of their revenue on servicing debt, which in some countries is already sizable (Figure 7). This leaves less room for investments and stimulus going forward. Government finances will thus be in a weaker position after this crisis to fight whatever crisis lies in the future.

Figure 6: Government bond yields are especially high in Indonesia
Figure 6: Government bond yields are especially high in IndonesiaSource: Macrobond
Figure 7: Interest costs already take a sizable part of government revenue
Figure 7: Interest costs already take a sizable part of government revenueSource: Macrobond, RaboResearch calculations

Monetary stimulus

The monetary policy response of most ASEAN central banks has been rather conventional, namely increased liquidity for banks and lower policy rates to spur bank lending and, through that, economic activity. ASEAN central banks still have room for further rate cuts as inflation is low and policy rates are still positive. We expect more rate cuts to come.

However, we think the effectiveness of these rate cuts will be limited, as banks will be less willing to lend to firms because of extreme uncertainty. Moreover, lower rates now will leave ASEAN central banks with less firepower for monetary stimulus in the future. With that in mind, we also expect some ASEAN central banks to start experimenting with unconventional monetary policy. Indonesia is a case in point, where a law change in March now allows the central bank (Bank Indonesia) to directly purchase Indonesian government bonds on the primary market (so-called monetary financing or debt monetization).

The results of this type of monetary policy are not yet entirely clear. In Japan it has led to a decline in banking profitability, while there is ongoing debate of its effects on inflation. Bank of England governor Andrew Bailey, for example, has argued that it can cause hyperinflation, while others disagree (here and here). In that sense, this type of monetary stimulus, at least in emerging markets, is akin to an experimental medicine for which we neither know its effectiveness nor its side effects.

Banks’ asset qualities are weaker than they appear

One more angle worth considering is that the economic contractions in ASEAN could substantially hurt banks because their non-performing loans (NPLs) will rise. On the surface, ASEAN banks seem to have healthy NPL ratios averaging 2.1, while the EU median is 2.6. However, in some cases these low NPL ratios paint too rosy a picture of the banks’ asset qualities[4]. If we take a broader definition, including ‘special attention loans’, the resulting ‘problem loan ratio’ is much higher for Indonesia, Thailand and Vietnam[5] (Figure 8). Nevertheless, ASEAN banks seem to have adequate buffers (Figure 9) in most cases, so in our base case we do not expect this economic crisis to turn into a banking crisis as well.

Figure 8: Low NPLs hide a sizable amount of troubled loans
Figure 8: Low NPLs hide a sizable amount of troubled loansSource: Macrobond. S&P
Figure 9: However, ASEAN banks seem adequately capitalized to take a hit
Figure 9: However, ASEAN banks seem adequately capitalized to take a hitSource: Macrobond, IMF

ASEAN currencies will take another battering

We believe that ASEAN currencies will depreciate against USD in the coming months. ASEAN currencies have strengthened remarkably well against USD since late March (Figure 10), despite outlooks (including ours) for the world economy having gotten gloomier. Partially this seeming optimism reflects the immense increase in the monetary stimulus provided by G10 central banks.

 Figure 10: Most ASEAN currencies have partially reversed their weakness since the outbreak
 Figure 10: Most ASEAN currencies have partially reversed their weakness since the outbreakSource: Macrobond

There seems to be a divide, however, between the economic recovery which financial markets seem to be pricing in and the real economy, which is painting an increasingly grim picture. Therefore, we wonder whether financial markets are not underestimating the medium- to long-term ramifications and risks of the COVID-19 crisis. These risks include another downward shock to commodity prices, sharper than expected GDP declines, and the risk of rising tensions between the US and China at some point in the near future. Ultimately, we think the economic reality will catch up with financial markets (especially currency markets) and if any of these risks materialize, this will fuel risk aversion and ASEAN currencies will see another bout of heavy depreciations.

Moreover, we think that the recent recovery against USD will be more than offset, leaving ASEAN currencies substantially weaker on a three-month view (Table 4).

Table 4: We think ASEAN currencies face another bout of weakness
Table 4: We think ASEAN currencies face another bout of weakness Source: Macrobond (current), RaboResearch (forecast)

Regarding specific currencies, we note that in Thailand, a drop in exports and tourism will likely lead the country’s current account surplus (the main driver of THB strength) to turn into a deficit.

The Indonesian rupiah (IDR) will be one of the weakest currencies going forward, despite being a relative outperformer in terms of economic growth. This is because IDR tends to be more sensitive to investor sentiment than most other ASEAN currencies, partially driven by the country’s dependence on commodities and the fact that a substantial part of Indonesian corporate debt (34%) is in foreign currency.

In Malaysia, political uncertainty, supply chain disruptions, relatively high corporate debt (68% of GDP) and weaker oil prices will put pressure on the ringgit (MYR).

The Vietnamese dong (VND) will be the outperformer of the pack, although we do point to the substantial risk of a currency devaluation since VND is essentially pegged to USD while Vietnam has very little foreign reserves (covering only 3 months of imports). This risk might surface if president Trump starts slapping tariffs on Vietnam as well.

The Philippine peso (PHP) has stayed remarkably stable despite COVID-19 and the Philippine stock market being down 41% at its weakest point this year. Possibly this indicates some support for the currency from the central bank. We would also expect financial markets to price in a hefty liquidity premium for PHP after the Philippine government decided to close down the country’s capital markets in March because the close down shows there is a clear risk of capital controls. The government’s move, however, has hardly dented PHP. We think this denting will come, with a vengeance.

For the Singapore dollar (SGD), there will be downward pressure because the economy is expected to contract substantially and because regional trade will be hit. However, what also matters is that the Monetary Authority of Singapore (essentially Singapore’s central bank) will be forced to let SGD (which is pegged to a basket of currencies) depreciate substantially to keep inflation from becoming negative. The latter is a clear risk given the size of contraction of Singapore’s economy.


[1] Within the Association of Southeast Asian Nations (ASEAN), our focus in this study is on Indonesia, Malaysia, the Philippines , Singapore, Thailand and Vietnam.

[2] Pessimistic estimates indicate that a vaccine might not ever be developed. However, that is not our base case and we definitely hope it doesn’t become our base case.

[3] We have left out Singapore in Figure 5 despite the country’s very high public debt (114% of GDP). That is because Singapore’s public debt is a special case, which cannot be compared to other ASEAN countries. Singapore’s government bonds can only be used for investments (in for example infrastructure) and not government consumption. The high debt is thus backed by assets. In fact, Singapore’s public assets exceed its public liabilities. To include Singapore in this figure would thus paint an unfair picture.

[4] The non-performing loan ratio is the ratio of loans in default (typically including loans for which interest or redemption is overdue 90 days) to total loans.

[5] Special attention loans (also known as special mention loans) are loans that are not in default yet but run the risk of becoming non-performing.

Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 1038 7752

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