he duration and severity of the pandemic has been more adverse than our previous baseline expectations,” S&P Global Ratings said in a press release from Singapore on Thursday. “As a result, we are revising downward our 2021 growth expectations for a number of emerging Southeast Asia economies.”

Private consumption and services will be hit hardest by the pandemic. While the new lockdowns this year have been less costly as economies adapted to reduced mobility, the longer durations have meant that the economic costs are rising. Meanwhile, external demand will provide a buffer against further outlook deterioration, it said. International trade remains strong due to healthy demand for goods as global economies open up.

“A fresh slump in demand in emerging Southeast Asia is hitting sectors that have already faced a challenging year,” said Vishrut Rana, Asia-Pacific economist at S&P Global Ratings.

“As the pandemic drags on, balance sheets will deteriorate for households, small and midsize enterprises, banks and the wider economy, leading to more medium-run economic scarring,” Rana added.

Policy settings across the region are likely to remain steady. Central banks are wary of easing further. The US Federal Reserve’s next policy change is likely to be a tapering of quantitative easing, and policy easing from Southeast Asian central banks could increase capital outflows in the region.

The central banks are already deploying a range of tools, including loan moratoriums and acquisition of public securities. Meanwhile, core inflation and broader inflationary pressures are subdued amid weakening domestic demand; so central banks are unlikely to tighten policy further, the press release said.

New fiscal stimulus measures announced this year by Southeast Asian countries have been more limited in scope, given that the fiscal policy space was significantly eroded during the initial pandemic escalation in 2020. Overall public spending is still set to support growth during the year based on previously announced measures and government budgets for the year, the statement added.

Forecast revisions

“We have revised our 2021 growth forecast for Thailand lower to 1.1 per cent from our June forecast of 2.8 per cent. The current Covid-19 escalation in Thailand is the most severe so far, after the country had successfully limited the spread in 2020.

“The escalation has led to reduced mobility, with tight lockdowns in place across 29 out of 77 provinces in August, and more moderate lockdowns in the rest of the country. Overall mobility was about 27 per cent lower than normal in August, according to Google Community Mobility data, which will slow down domestic activity,” the press statement said.

“In addition, the pandemic escalation has pushed back the likely timelines for greater normalisation of domestic activity and a gradual resumption of tourism,” it went on to say.

“The services and informal sectors in Thailand have been under strain from the absence of tourism,” Rana said.

“The additional strain from a pandemic-related drop in domestic demand will weaken these sectors further.”

S&P Global Ratings said it also lowered its 2021 growth forecast for the Philippines to 4.3 per cent from 6.0 per cent in June, and forecasts growth of 7.7 per cent in 2022 compared with its earlier forecast of 7.5 per cent.

Intermittent lockdowns have been weighing on economic activity, and a fresh escalation driven by the Covid-19 Delta variant has led authorities to re-impose more stringent lockdowns in a number of major cities, the press release said.

“The combined hit to activity from floods in parts of the Philippines and fresh lockdowns to contain the pandemic have significantly eroded what would have been a highly favourable base effect for the country,” said Vincent Conti, senior economist, Credit Markets Research at S&P Global Ratings.

“The longer downturn will cause even more economic scarring. By 2025, the Philippines’ GDP will likely be 12 per cent below where it would have been without the pandemic.”

The credit rating agency said it lowered its growth forecast for Malaysia to 3.2 per cent in 2021 from 4.1 per cent earlier.

Strong international trade is providing a sizeable buffer for growth this year. However, domestic demand is looking much weaker. Lockdowns to manage the pandemic wave have now been in place for around three months, the statement said.

The deeper downturn has cut activity in the services sector and is resulting in sizable job-losses – in June the unemployment rate jumped to 4.8 per cent from 4.5 per cent in May.

Malaysia now has a relatively high vaccination coverage, with about 52 per cent of the population having received at least one dose, according to the agency.

This will enable a gradual re-opening of the economy over the next several months.

Vietnam had largely managed to contain the pandemic until earlier this year, but cases escalated noticeably in July. Since then, tight lockdowns have been enforced across wide parts of the country to contain the spread of Covid-19, S&P Global Ratings said.

The pandemic has disrupted manufacturing supply chains in that country as various factories have had to cut production and capacity. “Overall, we forecast growth of 4.8 per cent in 2021, down from our June projection of 7.3 per cent,” the agency’s press release concluded.