A Closer Look at Policy Responses to Mitigate COVID-19

Citi analysts find that the economies facing the most growth risk due to COVID-19 includes China (the epicenter of the virus), Hong Kong (impact mostly on services), Thailand (tourism and services exposure), Vietnam (both on tourism and supply chain exposure), Singapore (exposure to China demand and through services exposure), and Korea (China demand, and supply chain route). New Zealand, Australia, India and the Philippines look relatively less exposed.

Policymakers in Asia have taken steps to support growth amid the virus outbreak and Citi analysts forecast global GDP of 2.5% in 2020 (revised down from 2.7% previously).  

• China – China unveiled a raft of measures to step up monetary and credit support. i) On 3 February, the People’s Bank of China (PBoC) lowered the interest rates on reverse repurchase agreements by 10 basis points and also injected a total of 1.2 trillion yuan into money markets through reverse bond repurchase agreements; ii) On 17 February, the PBoC further lowered the rate on RMB200bn worth of one-year medium-term lending facility (MLF) loans to financial institutions by 10bps to 3.15% from 3.25% previously; iii) On 20 February, the PBoC cut the one-year loan prime rate from 4.15% to 4.05%, and the five-year rate from 4.80% to 4.75%. This was the first cut since October last year.

• Singapore – On 17 February, a S$4bn Stabilisation and Support Package was announced to help companies in sectors such as tourism, aviation, commercial building (tenants), point-to-point/taxi operators as well as hawkers to counter negative impact from the epidemic across the next 3 months (this is larger than 2003’s SARS relief package of S$230m).

• Thailand - The central bank unexpectedly cut its benchmark interest rate for a third time in six months on 5 February, taking it to a record low of 1%, and is also the lowest in Asia.

• Indonesia – On 20 February, the central bank cut rates to 4.75%. This is the first rate cut since October 2019.

More monetary and fiscal stimulus on the way?

• On top of the measures already announced in China, Citi analysts expect an additional 10bps and 5bps of medium-term lending facility (MLF)/ standing lending facility (SLF) cuts in Q2 and Q3 and 50bps Reserve Requirement Ratio (RRR) cut in each of the two quarters.

• Korea is likely the next prime candidate to cut in February. Citi analysts also expect a rate cut in March for Malaysia (despite having already preemptively cut in January) which has relatively more room to ease given relatively high real rates. Singapore’s Monetary Authority of Singapore (MAS) released a statement saying that there was enough room within its currency policy band to accommodate an easing of the SGD Nominal Effective Exchange Rate (S$NEER), and there is a chance that MAS may formally ease policy in April.

• But ultimately, fiscal policy action may be key to mitigate the growth shock. With interest rates treading the perceived lower bound, many governments in Asia (outside of South Asia) have more space to lean on fiscal policy. A more pronounced fiscal easing in China may likely need to wait until after the virus can be contained, but areas of immediate demand support could arise from infrastructure push and property easing policies.