India is likely to suffer the second highest GDP contraction among all South East and Asia Pacific economies in FY21. If the estimated 8.1 per cent growth contraction in the Philippines makes it the highest among the subset, India’s projected 7.7 per cent deceleration places it second, followed by Thailand’s economy, which is set to shrink 6.8 per cent.
The worst-hit were those with extended lockdowns combined with large domestic outbreaks like the Philippines or domestic policy uncertainty like Malaysia, and Thailand and those with a heavy reliance on tourism and travel. According to the World Bank’s latest forecasts, Southeast economies endured a
rather sober fate in 2020 and sadly, the trend may prolong in 2021.That’s because many (clearly barring China) are highly dependent on either services sector, exports or tourism.
For instance, tourism-dependent Bhutan, Maldives, Nepal and Sri Lanka were hit hard. Maldives is likely to see more than a decade of per capita income gains wiped out in 2020, while Bangladesh, which had been one of the fastest-growing emerging markets prior to the pandemic, growth decelerated to an estimated two per cent in FY20 suppressed both by domestic activity and caused a double-digit
contraction in exports.
Likewise in Pakistan, growth may shrink 1.5 per cent in FY20 due to monetary and fiscal tightening prior to the outbreak. Recovery will be subdued, averaging 1.3 per cent in the next two years but below potential growth owing to continued fiscal consolidation pressures and services sector weakness. In Sri Lanka, the pandemic-induced shock further increased an already-high risk of debt distress with its sovereign spread over a 1,000 bps above pre-pandemic levels.
In Bangladesh, which relies on manufacturing and exports, recovery may be particularly modest with export growth remaining weak, especially in the ready-made garment sector. For others like Bhutan or Nepal, tourism revenue may be significantly below the pre-Covid 19 levels due to depressed demand given continued restrictions on international travel. Meanwhile, China and Vietnam are the only outliers with GDP growth expanding by 2 per cent and 2.8 per cent, respectively supported by a quick and sustained resumption of production and exports, besides stimulus-fueled public investment.
Meaningful foreign direct investments helped Vietnam, which unfortunately is projected to suffer an output loss of 4 per cent compared to pre-pandemic projections by 2022. The average size of fiscal policy packages within the East Asia and Pacific region was about five per cent of GDP comparable to the emerging market and developing economies, followed by policy rate cuts. Moreover, to cover the additional financing needs, several governments used domestic borrowing like China, Indonesia, Myanmar, the Philippines, while others relied more on external financing.
According to the World Bank, India’s growth rate may recover to 5.4 per cent in 2021, as the rebound from a low base is offset by muted private investment amid financial sector weaknesses. Bad loans were
already at high levels before the pandemic struck and the economic downturn may lead to further insolvencies among financial as well as non-financial corporations.
Worst seems to be over
The projected GDP growth of 7.7 per cent for 2020-21 does indicate that the worst is over. India Ratings estimates the Indian economy to surpass the FY20 level in FY22, but in a meaningful way in FY23.