Update Country Report Maldives 03 Aug 2020

Sri Lanka is the latest country in Asia to go to the polls since the coronavirus (Covid-19) outbreak, following South Korea, Mongolia and Singapore. Its general election has been postponed twice because of the pandemic but is set to go ahead on August 5th after the successful holding of mock elections that tested social distancing measures. Nevertheless, campaigning has not been entirely smooth, with the political parties asked in mid-July to refrain from holding rallies following a rise in local coronavirus cases.

As in other countries, the government's handling of the coronavirus will be a crucial factor in the election. Despite the recent spike, by most accounts the ruling Sri Lanka Podujana Peramuna (SLPP) has been relatively effective in its response, limiting the number of official coronavirus cases to fewer than 3,000 and coronavirus-related deaths to just 11 (as of August 1st), in a country with a population of almost 22m. Sri Lanka lifted local lockdown policies, including a night-time curfew, at the end of June but has so far refrained from reopening its international borders.

Sri Lanka under the Rajapaksas

While the economic cost has been sizeable, Sri Lanka's ability to contain the health risk-especially in comparison with its neighbours in South Asia-bodes well for the electoral hopes of the SLPP and the Rajapaksa brothers, for whom the party is a vehicle. The president, Gotabaya Rajapaksa, hopes that the election will install his elder brother and the former president, Mahinda, as prime minister (he is currently performing the role on a caretaker basis). We expect the SLPP to secure a comfortable parliamentary majority, with a good chance that it will secure the two-thirds margin required for constitutional revisions.

Under an aligned presidency and cabinet, we expect more cohesion in policymaking. This will help in terms of the ongoing response to the pandemic, as well as efforts to reboot the economy. However, it also points to heightened ethnic tensions, given the pro-Sinhalese majoritarian stance of the Rajapaksa brothers. If given the opportunity to reform the constitution, they will look to strengthen the powers of the presidency, which were weakened under the previous administration. A return to a system of fewer checks and balances would be reminiscent of Mahinda Rajapaksa's presidency in 2005-15.

In geopolitical terms, the Rajapaksas are known for their close ties to China. Given Sri Lanka's lack of fiscal resources, their hopes of boosting the economy will depend on foreign investment and loans, including from China. However, we believe that the brothers will want to avoid excessive dependence on China, given their recognition that such ties became a political liability contributing to the loss of the presidency in 2015. They will therefore also look elsewhere for support, including to India, the EU, Japan and the US, using Sri Lanka's strategic location in the Indian Ocean as a bargaining chip.

Muslim communities likely to suffer fresh infections following religious festival

Muslim communities across Asia celebrated Eid al-Adha, one of the two main festivals in the Islamic calendar, from July 20th to August 3rd. Bangladesh, India, Indonesia, Malaysia and Pakistan all have large Muslim populations. Although the festival is normally a time for gathering with family and friends, this year the pandemic meant that people were unable to meet in large groups, either out of concern about the virus or because of government-imposed restrictions. However, there is still a risk that there will be a rise in transmission of the coronavirus in the aforementioned countries following Eid al-Adha, caused by even small gatherings, weak enforcement of bans on mass gatherings or people violating the rules.

Pakistan criticised India for imposing restrictions on traditional prayers in Indian-controlled Kashmir, claiming that the authorities were using the coronavirus as a pretext to curb religious freedoms. Many countries in Asia have tightened political and civil liberties in the name of controlling the spread of the disease, and we expect such curbs to remain in place even after lockdowns and social distancing measures are lifted. Kashmir remains the main source of tension in the India-Pakistan relationship.

The end of Vietnam's coronavirus success story?

After over three months with no reported cases of local transmission, Vietnamese authorities on July 24th discovered several clusters of local cases linked to Danang, a central coastal city and popular tourism destination. The virus has since spread to the capital, Hanoi, as well as Ho Chi Minh City in the country's south-east and three other regions. Prior to this outbreak, Vietnam had recorded just over 400 cases-one of the lowest totals in Asia, and even more of a feat when scaled for population. However, there is now a high risk that the authorities will impose a second nationwide lockdown. The government has requested anyone who has visited Danang since July 1st to report for testing and has placed more than 16,000 people under medical surveillance.

We now plan to revise down our forecast that Vietnam's real GDP will expand by 3.3% in 2020. The developments also highlight an issue currently faced around the world: coronavirus infections begin to spread rapidly once lockdowns and other containment measures are relaxed, even when border controls and social distancing measures are in place. Australia, China, Hong Kong, Japan, Singapore and South Korea have all battled new local clusters in the past week. Governments must now consider whether to reimpose lockdowns in order to halt the spread of new clusters, at huge cost to GDP and employment, or to continue with economic re-opening and accept a rise in cases, which will inevitably put strain on healthcare systems. Both scenarios will have negative repercussions for social stability and carry risks for political stability, although we expect most governments to put the economy first and to opt for the latter course of action.

The week ahead

A fuller picture of economic performance across the Association for South-East Asian Nations (ASEAN) will become available this week, with Indonesia and the Philippines due to report second-quarter GDP data on August 5th and 6th respectively. We are expecting Indonesia's economy to post a 3.4% year-on-year contraction, as the pandemic hits household spending and private-sector investment. As a result of a strict lockdown from March to early June in response to the coronavirus pandemic, the Philippine economy is likely to contract by 10.7% year on year in the second quarter. Hopes for an rebound in the third quarter are being dialled back by the reintroduction of lockdown measures in parts of the ASEAN region, with the Philippines reimposing measures around the capital, Manila, amid a surge in cases following the easing of restrictions in June. Vietnam is similarly taking steps in that direction.

Elsewhere, we are watching central bank interest-rate decisions in India and Thailand this week. We believe that the authorities in both countries will hold fire on more interest-rate cuts this month as they wait for further information on the impact of the coronavirus on businesses and households. However, we believe that modest downward adjustments to rates will be forthcoming in the coming months. This will push Thailand's benchmark rate, currently at 0.5%, towards the zero lower bound.