Update Country Report Maldives 17 Aug 2020

The extent of the disruption caused by the coronavirus (Covid-19) in Asia will be made clear this week. New Zealand has confirmed that it will be delaying its general election on September 19th to October 17th, amid an outbreak in the city of Auckland. South Korea and the US have postponed the start of their joint military exercise by two days, until August 18th, to provide more time for coronavirus testing of army personnel. And the US and China did not hold planned trade talks on August 15th, with suggestions they were delayed in order to give China more time to catch up on purchases of US agriculture goods, following coronavirus-related disruption.

• Comfortable win still likely for Ardern and Labor

The postponement of the election does not change our view that the prime minister, Jacinda Ardern, will lead the Labor Party to a parliamentary majority in the polls. New Zealand has won plaudits for its management of the coronavirus pandemic and we do not think the Auckland cluster, which has led to the local reintroduction of lockdown measures, upsets that narrative. In addition, the public has generally been supportive of the government's goal of eliminating the virus and the restrictive policies that this has entailed.

While, in other countries, opposition political parties have protested against decisions to delay or consider delaying elections, the decision has been welcomed by New Zealand's main opposition National Party. The delay will give National more time to organise itself under its leader, Judith Collins, who was elected in July after short turns in office by her two predecessors. The state of disarray in which the opposition has found itself recently is a further factor informing our forecast that Ms Ardern and Labor will secure an outright majority, which would be unprecedented under New Zealand's mixed-member proportional electoral system, in place since 1993.

• Scaled-down US-South Korea drill could delay transfer of operational command

The delay in and scaling back of the joint exercise does not alter our view that the US-South Korea security alliance will remain firm. A planned drill in March-the first of the two that are normally held every year-was cancelled because of the coronavirus and the latest one has been delayed, following the positive testing of a South Korean soldier. In any case, the exercise will still go ahead, albeit with a scaled-down format, given challenges in the deployment of personnel. It will largely involve running computer-simulated war scenarios, rather than field exercises.

A more modest drill will be welcomed by the US president, Donald Trump, who has complained in the past about the expense involved. It may also result in fewer protests by North Korea, which perceives them as aggressive and has launched missiles in response to past exercises. Military co-operation between South Korea and the US is highly institutionalised, so the cost to combat effectiveness is not likely to be high. However, it adds to the likelihood that plans to transfer wartime operational control authority (OPCON) on the Korean Peninsula from the US to South Korea will be postponed beyond 2022.

• US-China trade deal to live on

The postponement of the talks does not appear to reflect a breakdown in the phase-one bilateral trade agreement signed in January 2020. While there have been suggestions of a scheduling conflict tied to the summer retreat of the Chinese leadership at the Beidaihe resort in northern China, it is more likely that the two sides are keen to delay the review of the deal until visibility improves. Economic disruption caused by the coronavirus has affected China's ability to honour the ambitious purchase commitments of US goods and services to which it signed up.

With US-China tensions escalating in nearly all areas, trade has, surprisingly, been one of the more positive aspects of the relationship. There has been genuine movement from China in terms of increasing its purchases of US agricultural and manufactured goods over the last few months. Food production in China has been disrupted by the pandemic, elevating the importance of imports, including from the US. This suggests a desire on China's part to at least prevent further deterioration of the relationship, and to defuse some of the rhetoric over China policy likely to be voiced during the US presidential election campaign (although it will not soften the US stance on China).

Concerns rise over contaminated food imports

In terms of coronavirus developments, food, especially chilled and frozen foodstuffs, has emerged as a hotbed for transmission. While evidence remains incomplete, it appears that the virus has, in many cases, been transferred onto food by infected workers in processing plants, and chilling or freezing the goods afterwards can prolong the survival of the virus on the surface. The coronavirus is thought to have originally spread from a seafood market in Wuhan, central China.

In the past week, the Chinese government discovered traces of the disease on imported food in three different cities during routine sampling. The authorities have ramped up testing of imported frozen foodstuffs since June, when the virus was discovered on a chopping board used for imported salmon at a wholesale market in Beijing, where a local outbreak took hold. A recent outbreak in Dalian, north-eastern Liaoning province, also spread from a seafood processing plant while, on August 11th and 12th, the authorities in Shenzhen, southern Guangdong province, and Xi'an, the capital of north-west Shaanxi province, both reported that samples from frozen seafood imported from South America (Brazil and Ecuador, respectively) had tested positive for the coronavirus.

Frozen food imports could also be the source of New Zealand's latest outbreak, which was discovered on August 12th after over 100 days without new infections. Three people tested positive at a refrigerator storage facility for imported food, although official investigations into the source of the cluster are ongoing.

The latest developments are likely to prompt consumers to reduce purchases of frozen food. We expect authorities to step up inspections of frozen imports, which may result in delivery delays and additional costs for producers, logistics firms and consumers. However, there may be new commercial opportunities to work with governments to invest in strengthening cold-chain logistics infrastructure and technologies.

The week ahead

Japan and Thailand's second-quarter GDP figures, both published on August 17th, largely aligned with our expectations. Japan's real GDP contraction of 7.8%, quarter on quarter (or 9.9%, year on year), compared with our estimate of 6.3%. The divergence will lead to a modest downgrade to our forecast that the country will record a contraction of 5.4% in 2020 as a whole, but we still see economic activity rebounding in July-September. For Thailand, its GDP contraction of 9.7%, quarter on quarter (or 12.2%, year on year), was slightly better than our -10.4% estimate. Nevertheless, with a resumption of cross-border tourism looking further away than we initially anticipated, we are reluctant to upgrade our forecast of a contraction of 5.3% in 2020 as a whole.

In the remainder of the week, we do not expect interest rate decisions in China, Indonesia and the Philippines to result in changes, with most central banks in the region pausing on monetary-policy loosening. External trade data for July will be made available by Indonesia, Japan and the Philippines, with the regional trend toward an incremental improvement in exports likely to become more visible.