Update Country Report Maldives 29 Jun 2020

• The national security law set to be enforced in Hong Kong this week will lead to a marked dilution of the territory's political freedoms, but it is unlikely to prompt an immediate exodus of capital and talent.
• Countries in Asia are ramping up coronavirus (Covid-19) testing capacity as they seek to manage risks tied to "second wave" outbreaks; companies may also want to explore precautionary testing of employees.
• Purchasing managers' index data for June due for release this week are likely to show a modest improvement in sentiment as Asia's economies exit a torrid second quarter of the year.

Asia's premier financial hub, Hong Kong, will be the centre of attention this week. China's central authorities are rushing through legislation to ensure that a controversial draft law on "safeguarding national security" in the territory is passed on or before July 1st-the date that marks Hong Kong's return to China and establishment as a special administrative region in 1997.

Rushing through Hong Kong's national security law

The standing committee of the National People's Congress (China's legislature) is meeting on June 28th-30th, unusually just one week after its previous meeting, when the national security law was first reviewed. On this occasion the committee is set to pass the law and add it to Annex III of Hong Kong's Basic Law (or mini-constitution); it will then become effective, likely almost immediately, after it is promulgated locally by Hong Kong's chief executive, Carrie Lam. Complementary local legislation may be introduced in Hong Kong to make some details of the law fit better with its legal system.

Hong Kong's common law system may require several court rulings before it becomes clearer how the law will be applied. However, it seems that it could be used to ban certain political parties and individuals from participating in scheduled elections for Hong Kong's Legislative Council (the local legislature) on September 6th; if so, this could be a trigger for fresh protests in the city. Foreign press freedoms will also be threatened. Retroactive application of the law-for example, to cover actions taken during 2019 protests-would be extremely troubling.

Although representing a marked dilution of Hong Kong's political freedoms, an exodus of companies and talent is unlikely. The territory still retains significant advantages as a financial hub for China and Asia, and firms may continue to see the national security law as having limited implications for commercial law. However, attracting fresh investment and human capital to the city will become more challenging, at least from destinations other than mainland China. This will erode Hong Kong's status over the medium term.

The international response to the national security law is also set to intensify, with the US Senate having recently passed legislation to sanction Hong Kong and Chinese officials seen to have undermined Hong Kong's autonomy. The legislation also provides grounds to sanction banks that knowingly do business with such officials. The Economist Intelligence Unit expects the legislation to receive White House approval, while the US will also proceed with steps to withdraw the economic privileges it accords the territory.

Testing ramped up in response to new coronavirus outbreaks

The Chinese authorities appear to have brought under control a potential "second wave" of coronavirus outbreak linked to a wholesale food market in the national capital, Beijing, with cases rising by an average of just 12 each day over June 21st to 27th. Compared with the period when China faced its first outbreak, the production of nucleic acid test (NAT) kits has been greatly expanded. The government has therefore been able to lean more heavily on mass testing as a means of epidemic control (although the NAT kits are not completely effective), having tested a large number of restaurant workers, delivery personnel and residents since the outbreak emerged on June 11th, with an official stating on June 28th that around a third of the capital's population had been tested.

Companies should be aware of the damage that could be caused to their brand should the coronavirus be detected among their staff or customers, and may consider testing all workers regularly as a precaution. PepsiCo, a US-based food and beverage company, was forced to suspend operations, test all staff and release a statement defending the safety of its products after an employee at one of its Beijing plants tested positive on June 15th. At least eight more cases have since been reported. Similarly, in Australia, a US-based fast-food chain, McDonald's, closed 12 restaurants in the south-east state of Victoria and tested all staff in June after a delivery driver tested positive.

New Zealand declared itself free of the coronavirus and lifted social distancing measures on June 8th, only to discover on June 16th two new patients who had recently travelled from the UK and been allowed to leave quarantine early on compassionate grounds. Since then, an additional 20 cases have been confirmed up until June 27th, most of which were connected to returning nationals, highlighting the risk posed by permitting visitors' entry. Ramping up testing rates has also been at the heart of New Zealand's response to the new outbreak, with the government on June 22nd introducing tighter border controls, such as including mandatory testing before people are allowed to leave quarantine.

The week ahead in data

This week will mark the end of the second quarter of the year, which has been a torrid period for most of Asia's economies. GDP data for the period will generally not become available for several weeks, with the exception of Vietnam, which as usual published its figures unusually early, on June 29th. They showed that economic growth slowed to 0.4% year on year, from 3.8% in January-March. Vietnam will be an outlier in the region, however, as the country's ability to effectively limit the spread of the coronavirus enabled it to avoid a lengthy and stringent lockdown. We are currently forecasting that Vietnam's economy will grow by 3% in 2020 as a whole.

In the meantime, this week will see the release of a spate of data. Japan will release industrial production data for May, alongside the quarterly Tankan survey of business confidence, on July 1st. The latter will provide a measure of effectiveness of the government's stimulus measures in keeping smaller businesses afloat. South Korea's goods trade data release, also on July 1st, will provide our earliest hard data on trade conditions during June; we expect a less steep export contraction than that in May. Purchasing managers' index data for June will also become available this week, likely showing a modest improvement in manufacturing conditions against the nadir recorded in May.