Worst over for Asean economies but challenges remain: BNP Paribas

WHILE the worst is over for Asean economies, many challenges remain and the largest risk to medium-term growth in the region arises from scarring of balance sheets and the likely spillover to the financial sector, said BNP Paribas in its Asean Outlook 2021 report.

Noting that Covid-19 cases have been rising over the past few weeks, with movement restrictions of varying degrees imposed in Indonesia, Malaysia and Thailand, the report - written by a team led by Siddharth Mathur, head of emerging markets research, global markets APAC - noted the larger risk is the likely damage to already fragile household and corporate balance sheets.

Even if households and firms rediscover their confidence when the Covid-19 pandemic fades in the second half of the year, they may lack the ability to spend, the report noted.

"Banks might become even more risk-averse to disseminating credit. Moreover, there are likely to be social consequences as damage to balance sheets is skewed towards poorer households and SMEs," it said.

Overall, the team said it expects a "tepid recovery" for the region, as domestic demand is likely to be constrained by the need to rebuild household savings.

The combination of a flat recovery and rising solvency risk means that the need for stimulus will remain, the report added.

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"With limited space, fiscal accounts are likely to consolidate, and the onus for stimulus likely to shift to monetary policy.

"We expect 50bp in rate cuts in both Indonesia and Malaysia in 2021, and quantitative easing on some targeted measures in Thailand. Even in the event of unexpected inflationary pressures from higher food or energy prices, we still do not think any Asean central bank would raise rates."