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Asian economies at risk from slow vaccine rollouts

Edward Bell - Senior Director, Market Economics
Published Date: 02 August 2021


Economic data out of Asia highlights the persistent threat to growth posed by Covid-19, particularly in countries that have had relatively slower vaccine rollouts. While most governments are eager to avoid imposing onerous and economically costly lockdown measures, the spread of more highly transmissible Covid-19 strains poses a major downside risk for regional growth in the remaining months of 2021.

China’s official manufacturing PMI fell to 50.4 from 50.9 in June while the services component moved to 53.3 from 53.5 a month earlier. Neither figure suggests a major downward shock to activity in China but it may temper the outlook for global growth in the second half of the year. the relative softness in manufacturing was affirmed by the Caixin survey of private sector manufacturers which fell to 50.3 for July from 51.3 a month earlier.

Southeast Asian economies in particular showed weakness for July with the Indonesian manufacturing PMI falling to 40.1 from 53.5 a month earlier while most other countries in the region languishing at sub 50 levels. Vaccine distribution has been comparatively limited in Southeast Asia: Singapore has managed to vaccinate the highest share of its population with 73% of the total either receiving a full or partial dose of a Covid-19 vaccine. But Indonesia has managed to vaccinate just 17% so far, similar to levels in Thailand while the Philippines has vaccinated just 11% of its population.

Risks to growth for the rest of 2021 has seen a substantial deterioration in the value of regional FX. After a strong 2020, USDPHP has surged to more than 50 in July, trading near its weakest level since Q2 2020 and is down by nearly 4% year-to-date (ytd). The rupiah has managed to limit some of its recent depreciation but still remains down 2.8% ytd against the dollar.

Southeast Asia FX under pressure

Source: Bloomberg, Emirates NBD Research. Note: index of past year where higher values indicate weaker currency.

India relative outperformer but price pressures increasing

India was a relative bright spot, however, as restrictions have eased and allowed economic activity to resume. The manufacturing PMI for July jumped to 55.3 from 48.1 a month earlier. The move upward was helped by much stronger output—hitting 57.6 from 47.3 a month earlier—while new orders were also higher. India has managed to vaccinate more than 26% of its population, although most have only received a single dose. Some states in India have ordered localized lockdown measures to stem a recent pickup in Covid-19 cases, even if the numbers are falling well short of the enormous wave seen earlier in April-May.

The Reserve Bank of India meets later this week (August 6th) but we expect no change in policy at this meeting with the repo rate held at 4%. Inflation has been rising in India in recent data prints—with both May and June above the RBI’s target of 4% ± 2. Price growth is likely to remain high for the remainder of the year thanks to oil prices holding sustainably above USD 70/b and the pressures from economic reopening. However, with India’s recovery still in an early stage we don’t believe the RBI will respond to higher prices with higher rates, setting up some downside risk for Indian bonds and the rupee.

INR and 10yr India government yields

Source: Bloomberg, Emirates NBD Research