EIC expects uneven CLMV economic recovery to continue in 2021

The global recession and COVID-19 pandemic heavily affected CLMV economies in 2020, resulting in major slowdown in Vietnam and Myanmar whereas Laos and Cambodia faced economic contractions from additionally specific negative factors. 

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In addition to COVID-19 impacts, Laos faced credit rating downgrades and debt distress burden which limited the size of stimulus responses and Cambodia suffered from the withdrawal of Everything-But-Arms trade from the EU, negatively affecting its exports performance. While showing signs of bottomed out in 2Q20, the overall CLMV recovery thus far remained sluggish, with the exception of Vietnam, supported by its strong export rebound, especially for electronics, and success in containing COVID-19 cases.

The economic recovery in 2021F continues to hinge on 3 major factors: 1) the effectiveness of COVID-19 containment and vaccine progress, 2) the size of stimulus packages to mitigate the scarring effects, while waiting for the herd immunity, expected to take place in 2022F in this region, and 3) country specific risks, such as debt distress in Laos and recent political and economic uncertainty in Myanmar. In 2021F, the outlook for economic recovery in each CLMV country is projected as follows:

• Vietnam’s strong recovery should remain on track with 2021F GDP growth expected at 7.0% (vs 2.9% in 2020) due to robust exports and resilient domestic economy. Nevertheless, the currency manipulator label by the US Treasury, despite no further punitive actions so far, remains a key risk for Vietnam’s future exports.
• Cambodia’s economy is expected to gradually recover with 2021F GDP growth of 4.0% (vs -1.9% in 2020), supported by export recovery, especially to China with recently signed China-Cambodia Free Trade Agreement (CCFTA). However, heavy reliance on suppressed foreign tourism (14% of GDP) will continue to be a key drag for Cambodia until widespread vaccination in the region.
• With limited fiscal space, Laos’ 2021F economic recovery is expected to be gradual with 4.5% GDP growth (vs -0.5% in 2020). Due to prolonged debt distress, Laos’ stimulus financing options remain limited. On the bright side, infrastructure investments from China will be key supports for Laos’ economy in the medium term.
• EIC revised Myanmar’s FY20/21 GDP growth forecast down to 0.0% (vs 1.5% in FY19/20) with substantial downside risks and high uncertainty. As the only country among CLMV with ongoing COVID-19 outbreak along with economic uncertainty, Myanmar’s current political instability is a major risk issue for the region to monitor. Potential foreign sanctions will likely further weaken Myanmar’s economic outlook and adversely impact its trade and investment partners as follows:
  • The potential sanctions both by foreign governments and private enterprises could hurt exports performance (26.4% of GDP) and dampen FDI (3.3% of GDP) activities. Recently, the US and EU (accounting for 20% and 14% of Myanmar Exports and FDI, respectively) are considering the economic sanction measures. Meanwhile, Asian countries (32% share for China and 18% share for Thailand) are less likely to impose sanction measures on Myanmar exports. However, with high political and economic uncertainty, FDI from Asian countries (80% of total FDI, of which 60% from ASEAN (mainly Singapore and Thailand), 7% from China, and 5% from Japan) could also be delayed.
  • Ethnic and political tensions could escalate to widespread social unrest or violent suppression which will exacerbate Myanmar’s already fragile domestic economy from ongoing COVID-19 pandemic, including the weakening Myanmar Kyat as citizens and businesses shifted toward safer assets. Further depreciation pressures for Kyat could also come from bleak exports outlook, larger current account deficits, and FDI reversal.
  • Thai exports to Myanmar (1.8% of Thailand’s total exports in 2019) should continue to face pressures from uncertainty on trade restrictions and weakening demands. TDI in Myanmar (1.6% of total TDI) is also likely to be delayed, pending clearing political developments. To further evaluate the impacts of Myanmar’s political turmoil, key factors to be closely monitored this year are1) economic and financial sanctions by major economies 2) degrees of political unrest and government suppressions and implications for domestic demands along with supply disruptions and 3) changes in key domestic policies and regulations.

In connection with Thai economy, gradual recovery of regional trades and investments is expected to continue with major downside risks for trades and investments in Myanmar.

• In 2H20, Thailand’s exports to CLMV displayed sluggish recovery while Thailand’s Direct Investments (TDI) in CLMV showed signs of bottoming out. Overall, Thailand’s exports to CLMV declined further in 4Q20 (-12.0%YOY vs -6.3%YOY in 3Q20). Exports to Myanmar (-19.1%YOY decline in 4Q20 from -5.4%YOY in 3Q20) were the key drag as the rise of COVID-19 cases in Myanmar led to tightening border restrictions and depressed Myanmar’s domestic demands for Thai goods. On the bright spot, exports to Vietnam continued to rebound (growing 3.6%YOY in 4Q20 from contracting -5.8%YOY in 3Q20) led by exports of car and components. Meanwhile, Thailand’s direct investments to CLMV economies accelerated to 26.1%YOY in 3Q20 after 3.9%YOY growth in 2Q20 with majority of investments went to Vietnam (49% share) and Myanmar (22% share). 
• Looking forward in 2021, the recovery of Thailand’s regional trades and investments is expected to be gradual and uneven along with CLMV recovery with substantial downside on trades and investments in Myanmar. Thus far, Thailand’s trades and investments in Vietnam displayed clearer recovery trends following Vietnam’s economic recovery. However, trades and investments with other countries remain subjected to major downside risks particularly for trades and investments in Myanmar, which will likely be delayed due to rising political uncertainty.

In the medium term, the Regional Comprehensive Economic Partnership (RCEP) is expected to support regional trade activities. RCEP is the largest deal in international trade history (covering 29% of global GDP) with the following projected impacts to its members:

• China, Japan, and South Korea will be the main beneficiaries from lower tariff barriers whereas ASEAN economies, including Thailand and CLMV countries, will see limited trade gains in this aspect. This is because RCEP is the first major trade deal for the three East Asian economies altogether, while ASEAN countries, including Thailand and CLMV, already have low tariffs under intra-ASEAN trade deal (AFTA) and bilateral ASEAN-plus-one trade deals between ASEAN nations and five major Asia-Pacific partners (China, Japan, South Korea, Australia, New Zealand).
• Nonetheless, CLMV economies are poised to substantially gain from lower non-tariff barriers resulted from RCEP’s key modern provisions, especially for trades in service, investments, and unified rules of origins. Moreover, Cambodia, Laos, and Myanmar will receive differential treatments, based on their slower development stages, to gradually reform and integrate themselves into RCEP trade networks, resulting in limited adverse impacts on their local businesses.
• In the longer term, under RCEP rules of origins and CLM developments, Thailand could benefit from repositioning itself as a regional investor, focusing on higher-value products, and outsourcing labor-intensive production steps toward growing CLM neighbors.