Update Country Report Maldives 20 Jul 2020

• Several economies in Asia have recently suffered a resurgence in coronavirus (Covid-19) infections, including Australia, China, Hong Kong and Japan, fuelled by the widespread relaxation of lockdowns in June.
• Meanwhile, countries in South Asia, led by India, continued to record rapid rises in their daily case counts.
• Keen to avoid repeating the economic damage caused by nationwide lockdowns in the first half of 2020, governments are trying to keep their economies running while implementing targeted lockdowns in the worst-affected areas.
• The localised containment strategy has seen success in China's capital, Beijing, but countries are yet to develop a foolproof approach, and, consequently, the recent outbreaks pose downside risks to our economic growth forecasts.

In the week beginning July 12th, 12 economies in Asia saw larger increases in new coronavirus cases than in the previous seven-day period, down from 16 countries the previous week. The largest rises were recorded in India, Bangladesh, Pakistan, the Philippines and Indonesia. All five of these countries saw over 10,000 new cases in July 12th-18th, with India alone suffering over 228,000 new infections.

India yet to find success with localised lockdown strategy

India lifted its nationwide lockdown measures on June 1st, which permitted a considerable recovery in economic activity, as supply-side constraints were eased, but also fuelled a continued increase in transmission of the coronavirus. High-frequency data indicate that the unemployment rate fell back to 7.4% in the week ending July 12th, from a peak of 23.5% in May. Local lockdowns present a risk that the contraction in real GDP could be even greater in the July-September quarter. People will have a higher propensity to save owing to lost income and concern for future job security. Weakness in private consumption will exert a drag on growth, and we therefore forecast that real GDP will contract by 5.4%, year on year, in July-September.

Local lockdowns present a risk that the contraction in real GDP could be even greater in the October-December quarter. Although a return to a nationwide shutdown is unlikely, some local governments, such as Bangalore, the capital of southern Karnataka state, have been forced to reimpose lockdowns following large spikes in their infection numbers. The government has made provisions to cushion the effect on the economy; for example, information technology (IT) services is a pillar industry in Bangalore,and the authorities have allowed them to keep operating, albeit only half of employees are allowed on company premises at one time.

Currently, restrictions on commerce have been fully lifted in the national capital, Delhi, aside from certain containment zones. However, the second-most populous city, Mumbai, the capital of western Maharashtra state, has been unable to lift its lockdown completely since it was first imposed in March, owing to the continued rapid spread of the disease. Should lockdowns be implemented more widely across the country, we will consider revising down our real GDP forecast for the July-September quarter.

Governments grapple with unknown origins of second waves

Several economies in Asia have battled against a resurgence of cases over the past week. China and Hong Kong saw the virus begin to spread again within their local populations (as opposed to infected travellers entering the country from overseas, who can be more easily identified and quarantined). China's north-western autonomous region of Xinjiang reported on July 16th that a local cluster had emerged in its provincial capital, Urumqi. The origins of the cluster are still unclear. Local media reported only that it was linked to a mass gathering, without supplying additional details. The province noted 29 confirmed cases and 38 asymptomatic cases between July 16th and 18th, prompting the local authorities to declare a state of "wartime" to bring the outbreak under control. This entailed placing Urumqi under lockdown, with all flights and most public transport services suspended.

Xinjiang will embark on a mass testing programme, a tactic that proved effective in the national capital, Beijing, although it remains to be seen whether Xinjiang can replicate its success in bringing a local outbreak under control. Beijing reduced its emergency response level on July 20th after 13 consecutive days of no new cases. The latest developments are in line with our forecast that China would suffer additional outbreaks throughout 2020, but would succeed in containing them at local level with targeted lockdowns, as well as mass testing and tracing. In addition, Xinjiang's contribution to national GDP is minor. Therefore, we do not plan to revise our 2020 real GDP forecast for China. We believe the economy will expand by 1.4% this year.

Hong Kong extended its tightened social distancing requirements for another seven days from July 20th. The authorities recorded 224 new cases in July 12th-18th, a figure that then rose by over 100 on July 19th alone, suggesting the emergence of a "third wave" of infections, after a second wave in March-April. The territory's leader, Carrie Lam, said on July 19th that there was no sign the situation had been brought under control. Hong Kong health experts have asked for a review of exceptions to epidemic control policies. Flight crews, for example, have been exempt from the quarantine and testing normally required of people entering the territory from overseas. A cargo pilot was among the recently detected imported cases, which are thought to have later spread to the local population. Our core forecast is that the heightened restrictions will remain in place for 3-6 weeks, although there is a significant risk the outbreak could last for longer, which would depress private business activity and contribute to a further rise in unemployment. There are, therefore, downside risks to our forecast that real GDP will contract by 3.3% in 2020 as a whole.

The week ahead

South Korea will report second-quarter GDP data on July 23rd, which we believe will confirm the economy entered a technical recession over the period: our estimate is that real GDP contracted by 5.1%, quarter on quarter, (or 4.7%, year on year). This will make it the second economy in Asia to enter such territory, following Singapore (China avoided a consecutive quarter-on-quarter decline in GDP in April-June). While a grim out-turn, South Korea's management of the epidemic has been relatively adept and we expect its economy to avoid the three consecutive quarterly declines it notched up in 1997-98 during the Asian Financial Crisis. GDP is forecast to expand by 3.3%, quarter on quarter, in July-September, but will not return to annual expansion until the second quarter of 2021.

The week will otherwise be relatively quiet in terms of economic data. Thailand will release June trade data on July 22nd and several economies are due to release inflation figures for the same month. No central banks have scheduled meetings during the week, although China confirmed on July 20th that there had been no change to its benchmark loan prime rate. The Australian government will be providing an update to its economic and fiscal outlook on July 23rd, when we expect it formally to adjust its GDP and budget forecasts for the first time post-coronavirus. For 2020, we are forecasting a GDP decline of 4.4% and a budget deficit equivalent to 7.5% of GDP.