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The near-term outlook is modestly good.
While the year 2020 will undoubtedly linger long in our collective memories, it’s time to look forward. As we move into 2021, three themes—rehabilitation, rectification, and reform—seem likely to shape Asia’s economic landscape in the coming year.
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Economies will be undergoing a period of rehabilitation as governments use the full array of policy tools to get the economies back on track and as corporations undertake the repair jobs needed to resume normal operations.
We expect continued and expansive policy support to reduce downside risks. Even on the fiscal side, governments have offered extraordinarily large support. They know that long-term risks of raising public-sector debt levels don’t offset the dangers of premature withdrawal of fiscal support. So, we expect some, if not a majority of, governments to maintain expansionary fiscal conditions. Other means of mitigating risks, such as moratoria on loan repayments, other regulatory forbearance, and government guarantees on loans, will likely continue. As expected, territories that have greater fiscal and monetary space will do better as they can continue to extend substantial help to the economy without being severely constrained by issues of debt sustainability or financial markets’ lack of confidence in central bank management.
Another factor to keep in mind is governments’ ability to manage the pandemic, i.e., their capacity to test, isolate, and treat patients on a massive scale. Economies with reliable health care capacity and widespread community cooperation may show faster economic recovery than others.
The degree of dependence on domestic or external demand is also key. Countries that have large engines of domestic demand (China, India) may be able to weather the storm should external demand remain patchy. For those that will rely on external factors, there are some favourable trends, such as technology (there might be some near-term deceleration in demand due to transient inventory dynamics, but the underlying structural story is a positive one), relocation of production out of China to lower-cost destinations and recovery in foreign direct investment in 2021.
The next step will be the process of rectification, with health care systems being a top priority. Governments will have to focus on:
Another priority is to manage the debt within each territory. Consumer debt remains high in South Korea, Thailand, and Malaysia, where central banks will renew efforts to contain growth once the crisis is over. Next comes infrastructure spending. Then comes governments’ responsibility to improve the business ecosystems to encourage domestic and foreign investors to increase the investment.
Several countries are likely to introduce more fundamental reforms directed at producing a new model for economic management and development so as to adapt to the substantial changes that the postpandemic world will bring. Not just the big economies, the smaller ones too are looking at ways to adapt to a new and possibly more challenging environment.
Speaking of game-changing innovations and disruptive new technologies, in the last section of this paper, we examine the digitalisation of payments and recommend action points for governments and corporations alike.
To read our analysis and outlook for specific Asia-Pacific countries, download the full report, Three themes driving the outlook: Rehabilitation, rectification, and reforms.