COVID-19 to knock $211b off APAC economies

APAC markets to toe the recession line amidst coronavirus spread.

Asia Pacific could lose as much as $211b in income as a result of the coronavirus outbreak, and will slow the region’s GDP growth to 4%, reports S&P Global Ratings.

The hardest-hit economies—Hong Kong, Singapore, Thailand, and Vietnam—are likely to record at least two quarters of growth substantially below trend. Although not a technical recession, S&P analysts noted that a GDP growth slowdown of economies will have a strong enough negative impact for unemployment to rise, underlying inflation to fall, and policymakers to react with stimulus.

For these economies, full-year growth is expected to come at around 1 ppt, noted S&P analysts Shaun Roache, Vishrut Rana, and Vincent Conti.

Further, the expected U-shaped recovery in 2020 has been pushed back until the third quarter, provided that signs emerge by the second quarter that the virus is globally contained. This delayed recovery will put large holes in companies’ balance sheets.

“Some economic activities will be lost forever, especially for the service sector. This loss will be distributed across the household, non-financial corporate, financial, and sovereign sectors based on the economics of the impact but also the policy response. The more that governments step in to cushion the blow with public resources, the more the burden will be shifted to the public sector,” the analysts said in the report.

The APAC markets’ financial conditions remain the key downside risk.

“Risk-asset volatility has risen, equity prices are lower, and credit spreads are wider. If this makes banks more cautious in their lending, this could amplify the real economic shocks in Asia-Pacific,” the analysts explained.

“For emerging markets, less external financing could force a rise in the current account balance.
The remedy would be either higher interest rates, tighter fiscal policy, or a much weaker currency. The currency option appears least painful but this could require a large depreciation. In thin foreign exchange markets, this threatens overshooting which could un-anchor inflation expectations and stress balance sheets with currency mismatches,” they added.