Emerging Asia typically has a high correlation to the growth cycle of developed markets, but has lagged their strong recovery this year, primarily due to reduced activity and mobility given fresh waves of COVID-19. The slow pace of vaccinations has played a key role, leaving much of the population vulnerable and preventing a faster pace of economic reopening.
Vaccination programs accelerated in April and May but with differing levels of success across the region. Through May, China and Singapore inoculated around 40% of their populations with at least one dose, and are on track to fully vaccinate 65% – 70% over the next three to four months. South Korea’s program accelerated after a very slow start and, at its current pace, should be able to achieve its 70% target by year-end. However, the rest of region has administered vaccines to less than 15% of their populations—some as low as 4%—with a pace of only 0.1% – 0.2% per day. This is less than a quarter of what many developed economies, as well as China, South Korea and Singapore, are administering and less than half of what other EM peers in EMEA and LATAM are achieving.
The main bottleneck, in our view, is limited supply of vaccine doses. Some improvements in procurement have occurred of late, but most EM Asian countries will likely have to wait until 4Q 2021 or the first half of 2022 to obtain enough doses to fully inoculate 65% – 70% of their populations. Countries with domestic vaccine production capabilities (primarily India, but also Thailand, Malaysia and Indonesia) are facing supply constraints on raw materials as well. Also, the distribution of vaccines could be delayed in countries that are more populous or have bigger/diverse geographies, like Indonesia and the Philippines, or are facing vaccine hesitancy issues, like Thailand and Vietnam.
We expect uneven economic performance across EM Asia in 2021 and have pushed out our expectations of a full recovery into 2022. Economies such as China and Singapore will be able to reopen earlier, while those geared more toward manufacturing exports, like Korea and Taiwan, should also continue to outperform. On the other hand, we expect Thailand and Malaysia to underperform as they are heavily dependent on tourism and will be unable to fully reopen their borders until late 2022. Likewise, domestic demand-heavy countries including India, Indonesia and Philippines will likely lag until they can contain the outbreak and/or accelerate their vaccination programs.
For fixed income investors, these dynamics should offer attractive opportunities at the front end of yield curves as monetary policy normalization is postponed, even as higher fiscal spending keeps the curves steep.