Thai economy faces 10% permanent loss if Covid recovery delayed: S&P Global Ratings

Southeast Asia now risks a delayed economic recovery that will steepen permanent economic losses, says a new report by S&P Global Ratings. Thailand and other major Asean markets are living with the effects of new Covid-19 waves that appear to have peaked only recently, according to the report, "Delay Risk on the Rise for Southeast Asia's Recovery".

"Our baseline estimates still assume emerging Southeast Asia will return to its pre-pandemic level of GDP around August of this year," said S&P Global Ratings economist Vishrut Rana. "However, delay risks are rising, and a prolonged recovery would drag on the region's growth rate and lead to higher permanent economic costs."

As hospitals filled up with Covid-19 patients in recent months, governments again restricted mobility and households voluntarily stayed home more often. Since late 2020, mobility has stalled and then fallen across Southeast Asia. While this has not led to a return to the harsh lockdowns, it could drag on first-quarter economic performance, the ratings agency said.

The biggest threat to speedy economic recovery is individual consumer behaviour, as people stay home more and spend less, it added.

A two-month delay in the recovery could cut S&P Ratings’ 2021 growth forecasts by about 1 percentage point, to 5.2 per cent, said the agency. About two-thirds of this decline would likely come from weaker-than-expected activity in the first quarter, which would have carry-over effects into the second half. It would also mean higher growth rates in 2022, off a lower base.

The longer an economy is stuck with unemployed resources, the larger the damage to balance sheets and workers. More businesses would close, and more workers would lose jobs, skills, and motivation. Together, this would hold back the level of activity once the economy reaches its new normal. S&P Ratings calls the gap between its estimate of the achievable new normal and the pre-Covid trend "permanent damage".

It currently estimates the permanent loss at about 7.4 per cent. This would rise to 8.1 per cent with a two-month delay in the recovery timeline. Thailand and the Philippines would likely see the largest permanent losses at about 10 per cent and 12 per cent, respectively. For Thailand, the issue is structural and related to the tourism sector which is expected to be among the last industries to recover from the pandemic.

However, external demand may boost growth more than expected this year, especially if the US adds more stimulus soon, said the agency. China's recovery may also rebalance faster than expected, lifting consumer spending and imports, including from the rest of Asia.

Southeast Asia’s emerging economies have secured enough vaccine doses for 40-50 per cent of their populations on average, and the ratings agency assumes inoculation will be in place by the second half of 2021.