World Bank - COVID 19 in East Asia

Myanmar

The World Bank expects full year real GDP growth to fall to between 2% and 3% in 2019/20.

Inflation is expected to ease to 7.5% YoY and the current account deficit to narrow to 3.3% GDP. 

Fiscal revenue collection fell to 16.8% GDP in 2018/19.  This would suggest a sharp rise in the fiscal deficit to 6.9% GDP, but the World Bank thinks under-execution in expenditure means the actual deficit will prove to be less than 5% GDP.

Myanmar is most exposed to the COVID-19 pandemic in three areas:

• Tourism arrivals (20% from China; 27% urban employment; hotels, transport etc. 16% GDP)
• Agriculture exports (78% of rural employment, 19% of exports, 4% GDP)
• Supply chain disruption for manufacturing (esp. garments, 13% of exports)

 

The World Bank sees second round effects as external demand weakens and expects a disproportionate impact of the slowdown to impact poorer households. 

(The Myanmar Garment Manufacturers Association is reporting at the end of March that demand from EU countries  – which represent some 70% of exports – has come to a halt).

In addition, the Bank has noted that the Kyat has appreciated by 9% against the US Dollar between October 2019 and March 2020, and by more against its trading partners.   This, it thinks, creates extra pressures for exporters in the short term.

The World Bank expects the economy to recover in 2020/21 and estimates real GDP growth in that year of 6%. 

Key drivers are investments in infrastructure, strong exports and resilient private consumption.

In respect of the longer term, the World Bank thinks that the COVID-19 crisis could result in the gains in poverty reduction of the last ten years being lost, as a result of the exposure of lower income households to the most impacted sectors in the economy, and of a drop in employment.   

COVID-19 apart, other key risks to the economy remain the vulnerability of the banking sector, the impact on foreign investment sentiment of the situation in Rakhine state, and the possibility of a loss of reform momentum ahead of the next General Election (due by November 2020).

Vietnam

Given its deep integration with the global economy, Vietnam has been hit hard by COVID-19, with manufacturing, tourism and transport activity falling abruptly during the first two months of 2020. 

It has also been feeling the effects of declining equity prices, rising sovereign spreads and decreasing capital flows.

And yet, the economy has remained resilient.  Exports rose by 8% in the first two months, FDI flows have been USD 2.5bn and retail sales have risen by 5.4%.

With adequate policy buffers in hand, Vietnam is judged to be well-placed to overcome this crisis.

2019 in Review

Preliminary data indicate real GDP grew by 7% in 2019, one of the fastest in the region.  Industry and service sector growth created 1.8mn jobs in 2016-18 and, by non-agriculture wage growth has contributed to a drop in the poverty rate from 9.7% to 6.7% over the same period.

Inflation pressures surged with higher food prices in Q4 2019 and this has persisted in early 2020 – the combination of seasonal effects and potential shortages resulting from restrictive measures to combat COVID-19.

The SBV started to ease its “prudent” monetary policy in September 2019.  In recent weeks it has responded to the crisis by cutting the policy rates by 1% and allowing banks to restructure loan maturities.

The external balance continued to improve in 2019, despite trade tension, and there was a current account surplus for the second year in a row.  Performance in early 2020 (above) suggests exports are resilient to the weakening external environment.

A continuing capital account surplus meant that FX reserves rose further from 2.8 months of imports in 2018 to 3.5 months in 2019.  Both nominal and real exchange rates have been relatively stable.

The overall fiscal deficit declined from 4.4% GDP in 2018 to 4.0% in 2019.  Public debt/GDP has declined from 59.6% in 2016 to 54.0% in 2019.

Outlook

The World Bank is suggesting growth in 2020 may decline to about 4.9% in 2020 (this is 1.6% below the earlier forecast). 

As of March, there have been relatively few reports of infections, and the largest economic impacts have been felt through tourism and supply chain disruptions. 

Inflation is expected to increase temporarily and, with many households now wage dependent even in rural areas, a slowdown in tourism, as well as manufacturing, could temporarily increase poverty during H1.

Weaker tourism exports and lower FDI inflows will likely cause a weakening in the external position. 

The fiscal position will temporarily increase as a result of lower revenue and fiscal stimulus.  However, the fiscal consolidation process is expected to continue from 2021. 

Over the medium term, growth is expected to recover to 7.5% in 2021, and converge at around 6.5% in 2022, with firmer external demand/services and a gradual recovery in agriculture.

Challenges and Risks

There is a risk that the short-term impact of COVID-19 should be more powerfully felt, especially in manufacturing and tourism.  Should the global effects of the crisis be felt for longer, Vietnam would be exposed because its economy is one of the most open in the world.

Strategies to help managing these risks include diversifying Vietnam’s trade flows and improving competitiveness.  Heightened global volatility underscores the need to maintain sound macroeconomic policies, including planned structural reforms, such as with SOEs.