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Economic Update: South East Asia

The ICAEW Economic Update: South East Asia, is a quarterly forecast for the region prepared directly for the finance profession.

Q1 2020 Summary

Published 11 March 2020

  • Following the outbreak of the coronavirus we have cut our 2020 GDP growth forecast for the South East Asia region by 0.3ppt to 4.2% on the back of weaker tourism, regional supply disruptions and softer household spending. This should be followed by a rebound to 5% growth in 2021.
  • Amid a deteriorating economic outlook, we expect macro policy to turn more accommodative across the region. Thailand, Malaysia and the Philippines have already lowered interest rates by 25bp this year. And we expect Singapore and Indonesia to follow suit, and another rate cut pencilled in for the Philippines. We also look for fiscal stimulus to complement central bank efforts to cushion the economic slowdown. 
  • The Singapore Government recently announced an expansionary budget for this year, underlining its intention to go all out in its fight against Covid-19, releasing a larger-than-expected fiscal relief package (1.2% of GDP). Thailand and Malaysia have also announced fiscal packages. 

Coronavirus outbreak to have a high, but short-lived, impact on growth

The adverse impact of the coronavirus, known as COVID-19, on China’s economy is set to spill over significantly to the South East Asia (SEA) region through lower tourism flows, household spending and some supply chain disruptions. We believe the impact of the coronavirus is likely to be larger than that of SARS as Chinese tourists now account for a larger proportion of visitors to the region and China is now more intricately tied into regional supply chains. But these headwinds are expected to be short-lived, and for now we expect that most of the economic impact will be in Q1 and growth will recover in H2 2020, supported by accommodative macro policies. 

The knock-on effect of Chinese travel restrictions on SEA economies will be large, particularly for those with relatively large tourism sectors that rely on Chinese tourists. Indeed, across the region tourism directly and indirectly accounts for between 6% and 25% of GDP. Thailand seems more vulnerable than the others. This is not only because tourism accounts for 20% of GDP, and 28% of all visitors are from China, but also because its economy is already under pressure from the strong appreciation in the Thai baht last year. 

The extension of the Chinese Near Year holiday will also likely lead to delays in the delivery of components that could lead to much larger overall losses in production. In a worst-case scenario, the absence of a key part may force the shutdown of a whole production line, severely magnifying the global impacts of the temporary halt to Chinese production.

Vietnam’s supply chain in particular is closely tied to China. Over 40% of core intermediate items used to produce Vietnamese goods are from China. Based on this metric, the Philippines also looks particularly vulnerable. Overall, we have pencilled in a sharp drop in industrial production and goods exports across the region in Q1. But, similar to the impact on tourism, we do expect this to be short-lived with a meaningful recovery to take place in the second half of the year. 

Despite the unexpected blow from the coronavirus, the US-China phase one trade deal and early signs of a recovering global electronics cycle bode well for the region’s external outlook. After a sharp setback in Q1, we expect exports and imports momentum to improve significantly through the rest of this year. And we expect domestic demand to stabilise on the back of easing macro policies. 

Overall, we have revised down our 2020 GDP growth forecast for the SEA region to 4.2% from 4.5%, which will be the slowest pace of growth since the global financial crisis. 
Due to the effects of the virus on tourism, Thailand is expected to be the worst hit among the SEA economies, so we have slashed the 2020 growth forecast to 1.9%, representing a slowdown from 2.4% in 2019. Vietnam and Singapore will also suffer with supply-side disruptions and travel bans. In contrast, we expect the hit to GDP in Indonesia to be contained, at just 0.1%, as its GDP relies less on tourism.

However, if the outbreak is prolonged, longer-term expenditures such as investment could be affected. Such second-round effects of confidence shocks could slash growth even more. At the moment, we think the impact will be high in Q1, but short-lived. 

Asia: GDP growth forecasts

More macro policy easing to soften the impact from the virus outbreak

Loosening of monetary policy within the region and proactive boosts to fiscal spending should offer support to domestic demand and partially ease the impact of the virus outbreak. Policy rates have already been cut in Thailand, Malaysia and the Philippines by 25bp each this year, with a further cut now expected in Indonesia in Q1 2020. We think the Monetary Authority of Singapore (MAS) may shift to a zero-appreciation bias in its trade weighted currency band (currently estimated to be around 0.5%) at its April meeting.

In addition, Singapore, Indonesia and the Philippines are also expected to run larger fiscal deficits in 2020 as governments in these countries introduce measures to soften the impact of the virus and pursue domestic investment programmes. Indeed, Singapore recently released its 2020 Budget and included a larger-than-expected fiscal relief package (1.2% of GDP) to help the economy cope with the outbreak. Both Thailand and Malaysia have also announced that they will unveil fiscal stimulus packages. While no details have been given yet, we expect them to be targeted at those sectors most affected by the virus: tourism and households.


We have downgraded our 2020 GDP growth forecast by 0.4ppt to 1% as the outbreak of the coronavirus takes a toll on Singapore’s economy. 

With the Singaporean Government closing its borders to all visitors coming through China, tourism-related sectors will suffer heavily, particularly in Q1. Services exports will see a sharp decline, only partially offset by weak services imports. Unlike during the SARS crisis, China is now Singapore’s largest trading partner, so we expect the negative impact on trade to be worse this time.

As the outbreak continues to dampen consumer sentiment, we forecast private spending to grow at a slower pace this year. Indeed, households and businesses are likely to delay purchases amid heightened uncertainty. Non-essential categories comprise around 30% of total private expenditure, so the government has adopted prompt response measures with transparent communication. If the virus continues to spread, consumer and business sentiment could take a further hit. This however, is not our baseline, and we think the outbreak might be short-lived. Accordingly, we expect long-term expenditures such as fixed investment to still grow at a healthy pace with a steady pipeline of public megaprojects – Changi Airport Terminal 5, North-South Corridor Expressway – and a recovery in private fixed investment expected to support construction activity. 

2020 budget fights coronavirus while also keeping a long-term focus

The good news is that Singapore has the policy space to buffer domestic demand to help offset the negative economic impact from the coronavirus outbreak. The expected change in stance of MAS will provide support as we forecast the exchange rate to depreciate in Q1 2020 compared to end-2019 before returning to an appreciating trend. 

Meanwhile, the government recently announced an expansionary budget for this year. The 2020 budget underlined the government’s intention to go all out in its fight against Covid-19, releasing a larger-than-expected fiscal relief package (1.2% of GDP). This was much bigger and broader than the 2003 SARS package (0.1% of GDP). The SGD 6.4bn package was divided up to support frontline workers (SGD 0.8bn), businesses (SGD 4bn) and households (SGD 1.6bn).

In line with the focus on job retention, a big chunk of the package for businesses and workers was reserved to help firms defray wage costs (SGD 2.4bn). This is opportune as softening labour market conditions are already putting pressure on private consumption. Tax rebates and working capital loan measures should also ease cash flow concerns for businesses, especially SMEs.

Importantly, the government kept open the possibility of further spending.

While there was greater focus on addressing short-term concerns, the budget still looked ahead and announced measures to tackle long-term challenges as well. These centred on preparing for rapid technological advancement, an ageing society and climate change. 

One of the largest budgets in history 

The government projected a substantial widening in the overall fiscal deficit to 2.1% of GDP in FY20 from 0.3% in FY19. Historically, however, the government’s initial deficit estimates tend to be more cautious. We have revised our forecast of the primary fiscal deficit for the financial year to 1.2% of GDP from 0.9%. This is slightly narrower than the budget estimate of 1.5%. Thanks to large fiscal surpluses in previous years, the government won’t have to tap into past reserves to fund its largest fiscal deficit in decades.

Primary fiscal balance


The Thai economy ended 2019 on a weak note with GDP growth slowing to 1.6% year on year in Q4. Growth weakened across the board in Q4. Amid softening labour market conditions, private consumption growth continued to moderate, slowing to 4.1% year on year from 4.3% in Q3. Investment also slowed sharply, growing a meagre 0.9% on the year as delays to the 2020 fiscal year Budget saw public investment contracting by 5.1% on the year (with a large decline in infrastructure spending). Externally, ongoing weakness in agriculture and manufacturing contributed to a 3.6% fall in export volumes. 

The soft Q4 outcome comes on top of the headwinds emerging from the coronavirus outbreak and delays in government spending. We believe the coronavirus will have a large negative impact on Thailand’s tourism sector and household spending, particularly in Q1. We are also likely to see a more muted but still negative impact on industrial production and goods exports following the disruption to supply chains and lower Chinese import demand. Overall, we have slashed our 2020 GDP growth forecast to 1.9% this year which will represent a moderation in growth from 2.4% in 2019.

The knock-on effect of the Chinese Government’s ban on outbound tourists on the Thai economy will be large. Tourism is one of Thailand’s key exports, equalling over US$56bn in 2018, with tourism (directly and indirectly) accounting for around 20% of Thailand’s GDP. Moreover, we believe the impact of the coronavirus is likely to be larger than that of SARS. Tourism not only accounts for a larger share of the Thai economy now than in 2003 but Chinese tourists also make up a larger proportion of visitors to Thailand, equalling around 28% of total tourists in 2019, up from only 6% in 2003.

While the impact of the coronavirus is likely to be large, similar to after the SARS outbreak, it is not expected to last long so we anticipate a solid recovery in economic growth in H2, supported by accommodative macro policies.

The Bank of Thailand reduced its policy rate to a new low of 1% in February. However, while inflationary pressures remain very muted we think further interest rate cuts are unlikely at the moment, as the authorities remain concerned over household debt levels.

Thailand monetary conditions

We also believe the impact of another 25bp reduction in the policy rate is likely to be small. Part of the slowdown in household spending last year reflects tighter lending conditions on motor vehicles so, with employment growth sluggish and consumer confidence low a further rate cut may not translate into a significant boost in spending on interest rate-sensitive consumer goods. 

Instead, we expect the Thai government to announce further support to households and the tourism sector. After a four-month delay the 2020 budget has been passed, clearing the way for THB3.2 trillion in government spending this year, which we expect to be front loaded to avert a deeper economic downturn. On top of this we look for an additional stimulus package to be announced to support households and the tourist sector which is being adversely affected by the coronavirus.

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