Asia Macroeconomic Quarterly Update

Cautious Recovery Amid Geopolitical Headwinds

Monday, 28th September 2020

Disclaimer

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH
and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are
solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch
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Contents

1. Asia Quarterly Outlook

2. Regional Deep Dive

3. Impact Of Geopolitical Developments On Asia

4. Q&A
1
Asia Quarterly
Outlook
Global Growth To Rebound In 2021, EM And Asian Outperformance
Global Economy To See Real GDP Rebound Asia To Outperform This Year And Next
% %

World DM EM EM Asia SSA LatAm MENA EM EM Europe

6 8

6
4
4
2
2

0 0

-2 -2

-4
-4
-6
-6
-8

-8 -10
2016 2017 2018 2019 2020e 2021f 2016 2017 2018 2019 2020e 2021f
e/f = estimate/forecast. Source: Fitch Solutions e/f = estimate/forecast. Source: Fitch Solutions

5
Still A Cautious Recovery In Sight For Asia In 2021
Growth Recovery Uneven
Real GDP, % chg y-o-y • We forecast that real GDP in Asia will
contract by 1.6% in 2020 and recover by
2020f 2021f
4.9% in 2021.
10.0
8.0 • All major economies contracted sharply in
Q220 except China and Vietnam. Both
6.0
these markets will post positive growth in
4.0 2020, albeit much slower than their
2.0 historical average.
0.0 • A recovery in 2021 will be contingent upon
-2.0 the strength of China’s recovery, which
will help provide a tailwind to the region’s
-4.0
external sectors.
-6.0
-8.0
• A potential vaccine for Covid-19 could
help accelerate the easing in border
-10.0 restrictions and thereby push tourism
India
Vietnam

Malaysia

Philippines

Indonesia
China

Taiwan

Pakistan
Singapore

Thailand

South Korea

Japan
Bangladesh

inflows.

• EM Asia will remain vulnerable to the

outbreak due to likely delays in securing
the vaccine.
f= Fitch Solutions Forecast; Source: Fitch Solutions

6
Short Term Uncertainty Could Raise Pressures On EM Asia
Abating Risk Aversion Cooling Losses In Asia
Spot Returns, % chg ytd

-2

-4

-6
PHP CNY TWD JPY AUD HKD MYR INR NZD KRW SGD IDR THB

Note: As of September 22. Source: Bloomberg, Fitch Solutions

7
2
Regional Deep
Dives
China’s V-Shaped Recovery Still On Track In August
Growth Most Likely Accelerated Further In August
Real GDP, % chg y-o-y • We forecast real growth of 2.2% for 2020,
as high frequency data released for
Estimated Actual
August suggest that our view for a V-
8.0 shaped recovery remains supported.
6.0 • According to our estimate, China’s real
GDP grew by 4.5% y-o-y in August.
4.0
• Industrial production growth seems to
2.0 have returned to normal operating range
prior to the Covid-19 outbreak, standing at
0.0 5.6% y-o-y in August compared with an
average of 5.7% y-o-y growth in 2019.
-2.0
• The strong industrial production growth
-4.0 was most likely partially due to surging
exports, with grew by 9.5% y-o-y.
-6.0
• That said, the recovery remains
-8.0 vulnerable amid still-weak domestic
Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20
Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20
Mar-15
Jun-15

Mar-16
Jun-16

Mar-17
Jun-17

Mar-18
Jun-18

Mar-19
Jun-19

Mar-20
Jun-20
demand, and a continued dependence on
external demand could derail it.
Source: Wind, Fitch Solutions

9
 Monetary Easing To Slow In China
Easing Likely To Slow Beijing Carefully Watching Growth In Home Prices
Medium-Term Lending Facility, Outstanding Amount, CNY100mn & rates, % Price Index Of Newly Constructed Residential Buildings, % chg m-o-m
MLF Stock (LHS) TMLF Stock (LHS) Tier 1 Tier 2 Tier 3 Overall
1-Year MLF Rate (RHS) TMLF Rate (RHS) 4.0
60,000 3.4 3.5
3.0
50,000 3.3
2.5
3.2 2.0
40,000
3.1 1.5
30,000
3.0 1.0
20,000 0.5
2.9
0.0
10,000 2.8 -0.5
0 2.7 -1.0
Dec-16

Dec-17

Dec-18

Dec-19
Jun-16
Sep-16

Mar-17
Jun-17
Sep-17

Mar-18
Jun-18
Sep-18

Mar-19
Jun-19
Sep-19

Mar-20
Jun-20

Oct-16

Oct-17

Oct-18

Oct-19
Apr-16
Jul-16

Apr-17
Jul-17

Apr-18
Jul-18

Apr-19
Jul-19

Apr-20
Jul-20
Jan-16

Jan-17

Jan-18

Jan-19

Jan-20
• We now expect the People’s Bank of China (PBoC) to slow its
• A slower pace of easing will help to prevent property speculation
monetary policy easing to the pace seen pre-Covid-19, by cutting its
and cool the country’s real estate market.
interest rates and reserve requirement ratios at lower frequencies
and by smaller steps compared with H120. • However, we expect the PBoC to remain accommodative, and
implement targeted and measured easing, to support the economic
• Given that the economy has rebounded quickly, the PBoC will most
recovery, especially if it falters.
likely shift its focus from growth support to ensuring financial stability.
Source: Wind, Fitch Solutions

10
China’s Recovery To Provide Some Lift To Regional Exports
Domestic Consumption To Rebound In Taiwan Domestic Consumption To Rebound In Taiwan
Taiwan – Contribution To Real GDP Growth, pp South Korea – Exports Vs Imports, % chg y-o-y

Private Consumption Government Consumption Exports Imports

Gross Capital Formation Net Exports 40.0
GDP 30.0
5.0 20.0
4.0 10.0
3.0 0.0
2.0 -10.0
1.0 -20.0
0.0 -30.0

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19
Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20
-1.0
2015 2016 2017 2018 2019 2020f 2021f

• We forecast Taiwan’s real GDP growth to 0.9% in 2020, as we
expect domestic consumption to rebound amid easing fears about a
contagion and a pick-up in domestic tourism activities.
• China’s recovery would further support Taiwan’s growth, given that
exports to China account for around 30% of Taiwan’s total exports.
f = Fitch Solutions forecast. Source: DGBAS, Fitch Solutions
• We expect South Korea to contract by -0.7% in 2020 and recover
by 3.8% in 2021.
• Our forecast for a strong recovery in 2021 is contingent upon
China’s return to a sturdy growth that will offer support to South
Korea’s goods exports. Meanwhile, domestic demand will remain
vulnerable due to the Covid-19 pandemic.
Source: Bloomberg, Fitch Solutions

11
Strong Rebound In Vietnam Following 2020 Setback
Healthy Growth Ahead
Real GDP Growth, %
• We forecast Vietnam’s real GDP growth to
Private final consumption Government final consumption slow from 7.0% in 2019 to 3.0% in 2020, due
Fixed capital formation Net exports of goods & services to strong containment efforts before staging a
Real GDP growth strong rebound of 8.2% in 2021.
12.0
• We forecast a strong trend growth rate of
10.0 above 6.0% over the medium term.
8.0
• Vietnam will continue reaping the benefits of
6.0 supply chain diversification/relocation from
China and improved market access with the
4.0 Vietnam-EU Free Trade Agreement, and
these will drive strong growth in
2.0
manufacturing.
0.0
• Strong economic growth and rising affluence
-2.0 will also strengthen growth in the services
sector, supported also by FDI seeking to tap
-4.0
2018 2019 2020f 2021f 2022f 2023f 2024f the burgeoning Vietnamese middle class.

f=Fitch Solutions Forecast; Source: SBV, Fitch Solutions

12
Recovery Also Underway In Malaysia
Record Contraction In Q220 Due To Lockdown
Real GDP, % chg y-o-y

Private Consumption Government Consumption Gross Fixed Capital Formation • We have revised our 2020 and 2021 real
Exports Imports Overall GDP forecasts for Malaysia to -4.5% and
15.0% 6.3% respectively, from -2.8% and 5.7%
previously.
10.0%

5.0%
• The steep 17.1% y-o-y contraction in
Q220, as well as heavy drags on both
0.0% domestic and external demand in H220
from continued movement and travel
-5.0%
restrictions, are the key drivers of the
-10.0% downward revision in 2020.
-15.0% • We continue to expect a strong recovery
in economic growth in 2021, with more
-20.0%
domestic movement and international
-25.0% travel restrictions likely to be lifted.
-30.0% • Combined with a broad global recovery,
both domestic and external demand are
-35.0%
Q219 Q319 Q419 Q120 Q220 likely to return to trend levels in 2021.
Source: Wind, Fitch Solutions

13
 Thailand To Keep Policy Supportive Amid Growth Challenges
Net Exports A Major Headwind To Growth Rates To Remain Lower For Longer
Annual Real GDP Growth By Component, pp contribution Central Bank Key Policy Rate, %

Household consumption Government consumption 3.5

Fixed capital formation Net exports
Real GDP growth 3
6.0
2.5
4.0
2.0 2
0.0 1.5
-2.0
1
-4.0
-6.0 0.5

-8.0 0
2017 2018 2019 2020f 2021f 2022f 2023f 2024f 2025f 2010 2012 2014 2016 2018 2020f 2022f

• We expect Thailand’s economy to contract by 6.6% in 2020 as a
whole before recovering by 3.8% in 2021.
• The collapse in global tourism due to the Covid-19 pandemic will
prove a major drag on growth over the coming years.
• Faced with higher unemployment in the informal sector and reduced
incomes amid the downturn, domestic demand is likely to remain
subdued as well over the coming quarters.
f = Fitch Solutions forecast. Source: BoT, Fitch Solutions
• In response, we expect policy to remain supportive for longer, with
the Bank of Thailand keeping its policy rate on hold into 2023.
• We also expect a looser fiscal stance over the coming years, with
stimulus packages to support employment, the desired shift to
higher value add manufacturing and boost domestic infrastructure
spending.

14
 Conditions In Indonesia Will Be More Subdued
A Slow Recovery In 2021 Fiscal Discipline Will Not Return Soon
Real GDP Growth By Component, pp contribution Budget Balance, % of GDP
Private final consumption Government final consumption
Fixed capital formation Net exports of goods & services 0.0
8.0 Real GDP growth
-1.0
6.0
-2.0
4.0
-3.0
2.0
-4.0
0.0 -5.0
-2.0 -6.0

-4.0 -7.0
2017 2018 2019 2020f 2021f 2015 2016 2017 2018 2019 2020f 2021f 2022f

• We expect Indonesia’s economy to contract by 1.3% in 2020 as a
whole before recovering by 3.3% in 2021.
• The recovery in domestic demand is likely to be delayed due to the
devastating impact the pandemic is having on Indonesia’s labour
market.
• We expect growth to continue to underperform the historical trend of
above 5.0%, over the medium term due to policy constraints.
f = Fitch Solutions forecast. Source: Fitch Solutions
• Following the government’s decision to relax the 3.0% of GDP
deficit cap in April, we have adjusted our fiscal deficit forecast from
2.8% previously to 6.3% in 2020.
• Concerns around prolonged funding of government debt by the
central bank (Bank Indonesia) have also risen as the government
looks to reform the law to align monetary policy more closely to
fiscal policy.

15
Slow Recovery Path In India
Economic Repair Will Take Some Time
Real GDP Growth, %
• We forecast India’s real GDP to contract by
8.0 8.6% in FY21 (April-March), with risks
weighted to the downside, as a result of the
6.0 economic shock of the pandemic.

4.0
• We expect a rebound in real GDP growth of
6.2% in 2021, supported by low base effects
2.0
in, and easier containment measures which
will allow some normalization of economic
0.0
activity.
-2.0
• Services will most likely remain in contraction
-4.0 over 2020 and lag manufacturing in the
recovery over the coming quarters.
-6.0
• Cushioning the economic shock, however,
-8.0 will be agriculture output from a strong
summer harvest supported by good monsoon
-10.0 rainfall.
FY19 FY20 FY21f FY22f FY23f

f=Fitch Solutions forecast; Source: MOSPI, Fitch Solutions

16
Second Wave Setback In Australia And New Zealand
Australia’ s Second Wave Larger Than New Zealand’s Slow Recovery In Sentiment Likely
Number Of Daily New Cases Consumer Confidence Index By Country, 100 = Neutral

Australia New Zealand

Australia New Zealand
800 100
90 140
700
80 130
600
70
500 60 120
400 50
40 110
300
30 100
200
20
100 10 90
0 0
80
11-Feb
25-Feb
31-Dec

19-May

8-Sep
10-Mar
24-Mar
7-Apr

2-Jun

11-Aug
25-Aug

22-Sep
21-Apr
5-May
14-Jan
28-Jan

16-Jun
30-Jun
14-Jul
28-Jul

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

Nov-18

Nov-19
May-11

May-12

May-13

May-14

May-15

May-16

May-17

May-18

May-19

May-20
• We expect Australia’s economy to contract by 3.9% in 2020 and • Business and consumer sentiment has been hit in both countries
New Zealand by 3.8%. Both countries have seen second waves of especially as border restrictions remain stringent, which has hurt
infection in Q320; however, Australia’s outbreak was greater than tourism sectors.
that of New Zealand's. • While New Zealand could benefit from China’s recovery, rising
• Therefore, Australia has also had to implement tougher confinement diplomatic tensions between Australia and China could spell trouble
measures, and any economic recovery in H220 could trail that of for Australia’s external sector.
New Zealand’s. • We believe that policy support and low base effects will help push
Source: Our World In Data, Bloomberg, Fitch Solutions growth to 3.5% in Australia and 6.0% in New Zealand in 2021.

17
3
Impact Of
Geopolitical
Developments
On Asia
A New ‘Cold War’ On The Horizon
A Position Diametrically Opposed to Western Liberal Values
Document No.9/Communiqué on the Current State of the Ideological Sphere
• We believe that a new 'cold war' between
the US and China is a growing possibility
1. Promoting Western Constitutional Democracy: An attempt to undermine the current leadership and over the coming years.
the "socialism with Chinese characteristics" system of governance. (Including the separation of powers,
the multi-party system, general elections, and independent judiciaries.) • The US and China’s fundamentally
opposed political systems will exacerbate
2. Promoting “universal values” in an attempt to weaken the theoretical foundations of the Party's mutual distrust as China continues to rise
leadership. (That “the West’s values are the prevailing norm for all human civilization”, that “only when as an economic, diplomatic and military
China accepts Western values will it have a future”.) power.
3. Promoting civil society in an attempt to dismantle the ruling party's social foundation. (i.e. • While China’s high degree of integration
that individual rights are paramount and ought to be immune to obstruction by the state.) with both the global and US economies
4. Promoting Neoliberalism, attempting to change China's Basic Economic System. (i.e. unrestrained will mitigate any catastrophic escalation of
economic liberalization, complete privatization, and total marketization.) tensions between the two sides, the
5. Promoting the West's idea of journalism, challenging China's principle that the media and publishing ongoing process of economic de-coupling
system should be subject to Party discipline. could prompt both sides to take greater
geopolitical risks.
6. Promoting historical nihilism, trying to undermine the history of the CPC and of New China. (For
example to deny the scientific and guiding value of Mao Zedong thought.) • Key theatres of potential military conflict
include the East China Sea, Taiwan Strait,
7. Questioning Reform and Opening and the socialist nature of socialism with Chinese characteristics. North Korea and the South China Sea.
(For example, saying “We have deviated from our Socialist orientation.”)
Source: Wind, Fitch Solutions

19
South China Sea Dispute Entering Riskier Phase
A Position Diametrically Opposed to Western Liberal Values
Document No.9/Communiqué on the Current State of the Ideological Sphere

• We believe disputes in the South China

Sea are entering a riskier phase.

• Pompeo’s declaration that China’s claims

in the Sea are ‘unlawful’ forces a choice
on other claimants in South East Asia.

• Side with the US and end talks with

China, or ignore the US declaration and
carry on negotiating?

• There’s a calm before the storm in the

short-term, as all sides are likely in a wait-
and-see mode before the US Presidential
Elections in November.

• Over the long-term however, confrontation

is likely to pick up. It is not in the interests
of SEA claimants to adhere to the status
quo.

Source: Wind, Fitch Solutions

20
South China Sea Dispute Entering Riskier Phase
South China Sea A Strategic And Resource Rich Region
South China Sea Estimated Reserves of Energy Resources
• We expect greater security cooperation
between SEA claimants and the US to
push back more strongly against China.

• China is deeply suspiciously of any third

party intervention in the region, especially
from the US and will likely react strongly
as well.

• As a result, we see elevated risk of

miscalculation and armed conflict in the
region.

• Indeed, China is unlikely to back down

given the strategic value of the Sea, which
also contains significant hydrocarbon
reserves.

• China’s aging population also means it

has a limited window to wield influence
and power abroad, meaning its assertive
stance is likely here to stay.
Source: Wind, Fitch Solutions

21
 Biden To Pursue Multilateral Approach To China And Asia
Laos And Cambodia Are Beholden To China US Participation Would Restore the TPP To Original Size
Laos & Cambodia - Debt Owed To China, % of GDP CPTPP & TPP Participant GDP and Trade Share, %

50 CPTPP TPP
45 40
40
35
35
30
30
25
25
20
20
15 15

10 10
5 5
0 0
Laos Cambodia Share of Global GDP Share of Global Trade
• We anticipate that a Joe Biden presidency would take a more • We expect greater US economic engagement with Asian nations
measured, multilateral approach towards confronting China. should Biden become president, and believe that he would begin
negotiations for the US to join the CPTPP.
• Biden would likely find building a counter-China ‘coalition’ a difficult
process, given the economic clout Beijing wields in Asia, and he • We see two scenarios for a second Trump term, depending on
would be forced to consider an issue-by-issue approach. whether he becomes status quo-oriented or continues to implement
Source: Wind, Fitch Solutions more dramatic changes to US foreign policy.

22
Q&A
Connected Thinking in
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