Asia/Pacific May 04, 2021 / 11:58 am UTC

Asia: From Containment Leader to Vaccination Laggard

By Charu Chanana
  • After being the leader in containment of the COVID pandemic in 2020, most of Asia has fallen back in the trap with cases rising again in most parts of the region. Slow pace of vaccinations also keeps the EM Asian economies at risk of further waves of the infection.
  • Bottom line: Most countries have tried to avoid prolonged and widespread lockdowns this year, resorting instead to targeted restrictions, which suggests that economic drag will be smaller than 2020. But the slow pace of vaccinations threatens to undermine the success of last year in containing the virus. We believe that none of the Asian economies will achieve herd immunity this year. The recurring COVID infections in most Asian economies have increased the downside risks to our 2021 GDP growth forecasts, especially for the EMs. Scarring effects are also likely to be more significant if the pandemic is delayed, which may mean downgrades to potential growth. We continue to watch for that.
  • Market implications: Targeted fiscal support measures are likely to continue, with a sustained focus on government debt levels. Central banks are also likely to continue signaling an accommodative stance to support the domestic recovery, and rate hikes are set to be delayed. Some peer EM central banks such as Turkey and Brazil have started hiking rates to respond to inflation risks. However, from a macro stability perspective, we think EM Asia is in a relatively much stronger position, and thus have the flexibility to more gradually normalize monetary settings. We believe the central banks of India and Indonesia will also continue to support government financing in a measured way.

Figure 1: Daily Confirmed Cases per Million People

Source: Our World in Data, Continuum Economics

Fresh Outbreaks Result in Renewed Social Restrictions

After being the leader in containment of the COVID pandemic in 2020, most of Asia has fallen back in the trap. What is different this time is the response from authorities, which has been less stringent given the blow to economic activity last year. Nonetheless, social restrictions of varying degrees have returned this year in most of the Asian countries. 

India has seen the steepest rise in COVID cases this year, with the daily case load topping 400,000 — the highest in the world. The rise in infections in Malaysia, Philippines and Thailand also remains concerning. Singapore, which has been considered a safe haven in the pandemic, has also seen a fresh outbreak. While the caseload is still tiny relative to U.S./EZ, the latest outbreak is alarming in that the city-state had maintained prudent social distancing restrictions, border controls and a speedy vaccination campaign. The spread of the more transmissible Kent variant around the world provides a warning to Asia. Overall, it suggests that the pandemic is here to stay in 2021 and some restrictions may be seen repeatedly around the region, without which it can spread quickly to larger populations.

Figure 2: University of Oxford’s COVID-19 Government Response Tracker: Stringency Index

Source: Oxford COVID-19 Government Response Tracker, Blavatnik School of Government, University of Oxford, Continuum Economics. Note: Values from 0 to 100 (100=strictest)

Most countries have tried to avoid prolonged and widespread lockdowns this year, resorting instead to targeted restrictions such as night curfews, reduced restaurant capacity, limited public transportation capacity, online schooling and reduced workplace capacity. The University of Oxford’s COVID stringency index (Figure 2) shows that social restrictions in Asia have increased since the start of the year, although they still remain below 2020. The sharpest increase has been in the Philippines, followed by India and Malaysia. 

Slow Inoculations Amplify Risks

The slow pace of vaccinations has kept us concerned about the concurrent waves of infection in Asia since the start of the year. Most Asian countries have administered vaccine doses to less than 5% of their populations, with only India having vaccinated around 9%, according to Our World in Data. This compares poorly to the U.S. vaccination rate of 44% of the population, and the U.K. reached 51% for at least one dose as of May 1. The pace of vaccinations in Asia been slow not just because of delays in vaccine procurement but also due to logistical challenges, regulatory delays and vaccine hesitancy. This is a stark contrast to the strong initial responses to COVID by many Asian economies last year, and threatens to undermine early successes.

Figure 3: Most Asian Countries Are Unlikely to Achieve Herd Immunity This Year

Source: Our World in Data, Continuum Economics

Figure 3 shows the vaccination progress of some of the Asian countries, and it remains plausible that at least the emerging Asian countries are unlikely to reach some form of herd immunity this year, which is normally regarded as 70% of the total population. India’s daily vaccination rate has dropped to under 2m per day as of May 4 from a peak of 4.5m in early April, and with that pace we estimate less than 150m people will be fully vaccinated by end-August, less than half of the 300m people targeted. Malaysia has been suffering from low registrations in phase 2 of its vaccination program, which is for those over 60 years of age and those with comorbidities, and may face excess supply issues in the third quarter. Indonesia, meanwhile, is facing an acute shortage of vaccines as supplies are drying up fast, forcing the government to ration the number of inoculations it can administer in the coming months.

In Japan, where a successful drive is being seen as crucial to the country's chances of successfully hosting the Olympics as planned, vaccine hesitancy has long been a problem. The country has one of the lowest rates of vaccine confidence in the world. Countries like China, South Korea and Australia have been under less pressure to vaccinate because they have been so successful at containing the virus through border controls, quarantines and aggressive contact tracing. Their economies were also more resilient last year, particularly China and South Korea, boosted by a surge in electronics demand. These countries can possibly afford the wait-and-see approach, but for India, the Philippines and Indonesia there could be a greater toll. Without herd immunity, countries risk introducing new cases if they loosen border controls and social distancing restrictions. 

Figure 4: Daily Vaccination Doses per Million Population

Source: Our World in Data, Continuum Economics

Loose Policies to Stay

The recurring COVID infections in most of the Asian economies have increased the downside risks to our 2021 GDP growth forecasts, especially for the EMs. We have recently revised down our GDP growth forecast for India. Scarring effects are also likely to be more significant if the pandemic is delayed, which may mean further downgrades to potential growth. We continue to watch for that.

The slow pace of vaccinations, meanwhile, suggests that further COVID waves remain likely in most of the region. The economic impact from these waves may remain limited compared to 2020, as lockdowns will likely remain less stringent — unless an India style outbreak is seen. Nonetheless, a return to normalcy is unlikely this year, and we expect the contact-intensive sectors such as tourism as well as services to remain underwhelming. This means targeted fiscal support measures are likely to continue, with a sustained focus on government debt levels. 

Central banks are also likely to continue signaling an accommodative stance to support the domestic recovery, and rate hikes are set to be delayed. Some peer EM central banks such as Turkey and Brazil have started hiking rates to respond to inflation risks. However, from a macro stability perspective, we think EM Asia is in a relatively much stronger position, and thus have the flexibility to more gradually normalize monetary settings. We believe the central banks of India and Indonesia will also continue to support government financing in a measured way. 

Asset rotation away from Asia may emerge as the U.S. economic recovery gains traction and EM Asia’s still moderate growth prospects become more exposed. Still, we do not see FX risks becoming material as the Fed will not likely unwind its extraordinary policy accommodation this year.

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Analyst Certification
I, Charu Chanana, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.