Update Country Report Maldives 10 Aug 2020

As the coronavirus (Covid-19) health emergency subsides in Thailand, protests are resurfacing. The country has been among the more successful in Asia in terms of combating the pandemic, having recorded around 3,350 cases and 58 deaths (as of August 10th). Having gone over two months since the last case of local transmission, the authorities are reopening more parts of the economy. Schools are set to open fully without social distancing restrictions from August 13th, having partially reopened in early July.

The normalisation of economic and social life contrasts with the ongoing national state of emergency. The government first issued the decree in late March, in response to the coronavirus pandemic, and has extended it repeatedly since then, most recently until end-August. We believe it will eventually be extended until the end of the year, as the risk of a second wave persists. Besides boosting the government's resources to tackle the pandemic, it gives it the power to suspend fundamental freedoms, including gatherings and speeches deemed critical of the regime.

As the pandemic subsides, political risk returns in Thailand

The extension of the state of emergency, despite the pandemic having come under greater control, is one factor driving a recent uptick in anti-government protests. Peaceful protests, mainly attended by students and young activists in mid-July in Thailand's capital, Bangkok, were the largest for several years. Several similar gatherings have been held since, with small-scale protests held across Thailand on August 8-9th following the arrest of a human rights lawyer and a student activist. On August 10th competing pro- and anti-government rallies were held in Bangkok.

Among the demands of the protesters are fresh elections and constitutional reform. They dispute the terms under which the 2019 general election was fought and that resulted in Thailand's prime minister and former army chief, Prayuth Chan-ocha, who was first installed following a military coup in 2014, securing his grip on power. Unusually, indirect criticism of the King of Thailand has also been voiced by protesters, despite a draconian lèse-majesté law being in place, with questions being asked over the relationship between the monarchy and the military. The economic recession induced by the pandemic and levels of social inequality are also contributing factors. The youthful leadership of the protests bears some resemblance to those in Hong Kong in 2014 and 2019.

Meanwhile, tensions within the government have also become apparent. Six ministers, including the deputy prime minister, Somkid Jatusripitak, departed the cabinet in mid-July. This was tied to factionalism and horse-trading within the ruling Palang Pracharat Party, rather than the emerging protest movement. Prayuth has recently confirmed replacements for the roles, but the loss of Mr Somkid-Thailand's economic czar for the past several years-will be keenly felt. A new governor for the Bank of Thailand (the central bank), Sethaput Suthiwart-Narueput, will also begin a five-year term from October, adding to a sense of policy uncertainty.

Political instability in Thailand has long been a challenge for investors. To date, protests remain mild compared with those in 2013-14, for example, and even if they mount in the coming months, we do not believe they will topple the government (we are forecasting that Prayuth will see out his term in office). However, they warrant close observation: widening criticism of the monarch, in particular, would move Thai politics into unprecedented territory and elevate political risk substantially.

Comparing the responses of Japan and South Korea to the health crisis

Japan suffered its first wave of coronavirus cases later than did South Korea, with infections first spiking in March, a month after South Korea discovered the disease had taken hold domestically. Both countries brought their first major outbreak under control, however, and from mid-May to late-June they kept new infections at a manageable level, below 100 cases per day. While South Korea has maintained its success, Japan saw transmission accelerate again since the end of June. Cases have continued to spike recurrently since, especially in the national capital, Tokyo, and other large cities.

The resurgence of the coronavirus in Japan has weighed heavily upon consumer sentiment and has disrupted commercial activity. We expect real GDP growth to contract by 8.6%, year on year, in the second quarter of 2020 (a contraction of 6.3% in quarter-on-quarter terms), and to remain in negative territory in the second half of the year, averaging a decline of 5.4% in 2020 overall. In South Korea, consumer and business confidence has held up comparatively well, although the economy's reliance on the external sector has made it vulnerable to the economic downturns in its trading partners. We expect real GDP to contract by 1.8% in 2020 as a whole.

The South Korean government's virus-control measures have been swiftly and decisively implemented, and this is arguably the reason why it has maintained control of the health crisis, while Japan has been less successful. The South Korean authorities have implemented free mass testing, fast contact tracing, social distancing recommendations and clear public health information and instructions. In addition, the government has unveiled three supplementary budgets and a series of additional fiscal-aid packages to cushion the effects of the pandemic on employment, low-income households and small and medium-sized enterprises (SMEs). Meanwhile, the penetration of technologies is also a determining factor. Compared with South Korea, Japan, especially in suburban and rural areas, has a lower internet penetration rate (as well as less effective statistical collection), which has arguably prevented the rolling out of mass testing and tracing to identify coronavirus patients and their contacts.

The South Korean government's actions have been perceived as timely and effective by the public, which helped the ruling Minjoo Party win a landslide victory in the general election in April. In Japan, in contrast, the public views the government's response as slow and reluctant. The decision to lift the state of emergency and domestic travel restrictions in May, in particular, has attracted criticism. In addition, the public have been dissatisfied with limited testing capacity and delays in distributing financial aid to households. The continued rise in cases will weigh upon the popularity of the ruling Liberal Democratic Party (LDP). We therefore expect the party to decide not to hold a snap election for the lower house of the Diet (the parliament) in autumn 2020, out of concern that it could lose its super-majority.

The week ahead

Leading economic data releases this week is that for second-quarter Malaysian GDP, due to be published on August 14th; we are expecting a contraction of 8.4%, year on year, to have been recorded, with the economy expected to shrink by just over 5% in full-year 2020. Following its inflation release on August 10th, which confirmed strengthening demand, China is also scheduled to release its July data for industrial production, investment and retail sales. Meanwhile, India is also releasing a range of data, including for industrial production (June), consumer price index (CPI; July) and external trade (July).