Update Country Report Maldives 06 Sep 2021

• The Covid-19 pandemic has disproportionately affected global services activity. Data from The Economist Intelligence Unit show that related service trade values fell by almost 20% in 2020, against a fall of 8% in goods trade.
• Disruption to international travel has been the major factor affecting services trade. Services exports from some markets have been sustained by the presence of established business outsourcing operations, although the future of multinational investment in these sectors may be coming into question.
• Rising freight rates have supported the value of transport service exports in several Asian markets, helping to offset the impact of movement restrictions. However, attachment to "zero-Covid" strategies will maintain operational challenges for companies amid recurring shutdowns of ports and logistics hubs.

The impact of Covid-19 on global merchandise trade flows was less severe in 2020 than initially feared, as electronics demand, fuelled by social distancing and remote-working arrangements, underpinned export strength (primarily from Asia). The services trade picture has been less rosy. Restrictions on travel have weighed heavily on international tourism-a major component of global services trade. Our data indicate that aggregate services trade at the global level (measured in US dollar terms) fell by almost 20% in 2020, against a contraction in goods trade values of around 8%.

Unlike the outlook for goods trade, where global merchandise trade values have already returned to pre-crisis levels, we forecast another poor year for services trade in 2021, as the recurring incidence of Covid-19 motivates tight international border controls. In consideration of our regional tourism and vaccination campaign forecasts, we do not expect global services trade to return to its pre-pandemic level until 2022. For Asia specifically, this will continue to weigh heavily on economies that depend on foreign tourist arrivals, such as Macau, the Maldives, Sri Lanka and Thailand.

The services sector (beyond tourism)

Services trade activity is made up of many important components beyond tourism, however. India, for example, is South Asia's largest exporter of services (and among the top three in Asia, alongside China and Singapore). These exports are heavily tilted towards information technology, reflecting a trend over the past few decades by which large Western companies have offshored technical support functions to India to take advantage of cheaper labour costs and the prevalence of strong technical and English language skills.

Those factors played to India's advantages during the pandemic, as remote-working arrangements drove global consumer and enterprise demand for technology services. The fact that many of these activities themselves can be performed remotely also helped to sustain the sector's resilience in the face of the coronavirus-related disruption that swept India in 2020. These factors cushioned India against wider disruption of its services trade: the country's services exports fell by only 5.4% in 2020, outpaced only by China (-3.7%, assisted by its swift recovery from Covid-19 and resilience in transport service exports), the only other Asian market of a similar scale.

The resilience of this model was also evident in the Philippines, another offshore business hub. Although that country accounts for less than 3% of Asian service exports (in US dollar values), its "other business service" exports-which include professional services ranging across various technical and research functions-constitute a large part of its services trade.

As in India, strong English language skills, alongside attractive wages, have driven multinational investment into the business process outsourcing (BPO) sector over the past decade. In 2020 the country's overall service exports collapsed by 23.9%, placing the Philippines among the hardest hit in Asia. However, growth in business service exports was flat, helping to stabilise the pandemic-induced blow to the country's services account.

Is the outsourcing model in danger?

Covid-19 has nevertheless raised questions over the future of regional outsourcing. The pandemic has not altered the structural competitive advantages of markets such as India and the Philippines, in terms of low labour costs, foreign-language competence and strong technical abilities. However, it has sparked concern over the sustainability of remote working and other arrangements seen as necessary for pandemic mitigation; industry surveys indicate that only 70% of BPO workers in the Philippines were able to benefit from remote-working arrangements, owing to deficiencies in telecommunications and internet infrastructure (although this number rose to 90-95% in India). That the service sectors in these countries are highly concentrated in specific locations-namely Bangalore in India and the capital, Manila, in the Philippines-will also frustrate future attempts to spread risk geographically, with sudden shocks (such as social distancing restrictions or quarantine measures) specific to those cities suggesting concentrated risks to business activity.

The disruption of in-person working may lighten corporate appetite for investment in offshore services activity. In the near term, however, multinationals are not yet rushing to adjust these arrangements. Although a survey undertaken in late 2020 by a US consultancy, BCG, found that 67% of responding companies felt that the development of in-house capabilities had helped them to navigate the pandemic, an equal amount reported that increased outsourcing delivered similar success. This should keep the risks of reshoring low in the immediate future, but deterrents to investment will build as national vaccination campaigns continue to drag on.

Transportation services: a regional anchor

Booming global demand for Asian goods has also buoyed another important segment of services trade: transport services. These activities account for a significant portion of service exports across major Asian exporters, particularly Hong Kong and Singapore, which are regional entrepôts.

Soaring oceanic freight costs inflated these values over the first half of 2021, especially among countries that play critical roles within the Asian electronics supply chain. Over the first half of this year, transport service exports jumped by over 100% year on year in China, which is home to some of the busiest container ports in the world (such as Shanghai, Ningbo-Zhoushan, Shenzhen and Guangzhou). Similar growth was recorded in South Korea (67.8%) and Taiwan (65.9%), while stronger performance has been evident in markets that provide a detailed breakdown on their transport freight service exports.

However, other major exporters have not fared as well. Singapore and Hong Kong-both of which lie within the world's top ten busiest container ports-have seen transport service exports struggle in 2021, despite rising trade and price factors. This may be explained by strict quarantine measures that have dampened shipping and logistics activity (as well as passenger transport, although neither market provides a quarterly data breakdown between passenger and freight services).

The prevalence of "zero-Covid" strategies across many Asian markets-which prompted partial shutdowns at major Chinese ports in May-June and most of August-suggests that these constraints will persist into early 2022, in line with national vaccination timelines. While these dynamics are unlikely to erode critical growth pillars of service exports in the region, the resulting congestion generated by these incidents will weigh on logistics networks and keep freight rates elevated into 2022, carrying more significant considerations for business operations that may not be reflected by the headline data.