JAKARTA (TheInsiderStories) – Moody’s Investors Service says that shifting supply chains, as countries reconfigure trade relationships following the coronavirus crisis, will have mixed credit implications for the Association of Southeast Asian Nations (ASEAN). Specifically trade diversification is likely to favor ASEAN economies over time, adds by the agency.
While, the reshoring of supply chains closer to consumer markets – especially in sectors with heightened security requirements such as pharmaceuticals – could move productive capacity away.
“We expect many governments and companies will reduce their dependence on China in global value chains moving forward, driven by the coronavirus outbreak, the China – US trade conflict, and heightened national concerns over economic security,” says Deborah Tan, a Moody’s analyst in the latest report.
She continued, “While the technological capabilities of the ASEAN region still lag those of more advanced Asian economies, particularly in electronics, a general openness to foreign direct investment and lower production costs will offer some advantages.”
According to her, recent events will accelerate the offshoring of activities to ASEAN at the expense of trade with China, although an exodus of foreign companies from the Chinese markets is unlikely even as companies step up efforts to mitigate risks. In addition, said Tan, the ASEAN economies stand to benefit from the efforts of producers to diversify their sources of supply, they will be negatively affected if reshoring trends become more pronounced.
Yet, there are three ways in which the ASEAN economies might mitigate the impact of a possible reshoring trend and the associated fragmentation of the global trading system sucha as enhancing free trade agreements with advanced economies. Then, deepening regional trade agreements and developing ASEAN further as a trading bloc in its own right. However, for the latter, ASEAN will first need to address structural challenges to harness the bloc’s full potential.
Earlier, Tan rated, the policy measures taken by the ASEAN-5 economies – Indonesia (Baa2 stable), Malaysia (A3 stable), the Philippines (Baa2 stable), Vietnam (Ba3 negative), and Thailand (Baa1 stable) – will reduce some of the negative effects of the COVID-19 outbreak, but will not offset the rising recessionary or credit risks for most sectors.
The various policy measures will mitigate credit-negative pressure on companies, banks and the broader economy, but weakness in trade, commodity prices and general sentiment will weigh on growth for all five economies.
The five economies are highly integrated in regional manufacturing supply chains and are experiencing sharp declines in external trade flows, while ongoing travel restrictions are weighing on tourism-related revenue and export earnings. At the same time, sluggish commodity prices are pressuring fiscal revenues for commodity exporters.
Financial market volatility triggered capital outflows in March and April, although lower dependence on foreign-currency denominated debt for most governments will to some extent shield them from currency depreciation risk
The fiscal costs of the support measures will be significant, with debt burdens only stabilizing from 2021 for most economies, although the ASEAN-5 countries had adequate buffers prior to the pandemic that provide them with the fiscal space to respond to the crisis.
Edited by Editorial Staff, Email: firstname.lastname@example.org