Covid seems to be the “Achilles heel” for Southeast Asian economies, says Jefferies

SINGAPORE – Failure to contain Covid infections is hindering the recovery of many Southeast Asian economies, says Jefferies’ Sean Darby.

“Indonesia, like many of the ASEAN economies, has not really gotten the Covid-19 virus under control,” Darby, global head of equity strategy for the US investment bank, told CNBC’s “Squawk Box Asia” on Tuesday.

“That seems to be the Achilles’ heel for the ASEAN economies at the moment,” he said, referring to the regional grouping of the Association of Southeast Asian Nations.

Goldman Sachs recently trimmed its 2021 growth projections for major economies in Southeast Asia, as a surge in the more contagious Delta variant in recent weeks set daily record highs in infections in Indonesia, Malaysia and Thailand.

Indonesia’s creditworthiness under pressure

The regional surge in infections has also challenged the creditworthiness of Southeast Asian economies.

Moody’s Investors Service warned Monday that resurgent Covid infections in Indonesia could undermine the country’s creditworthiness.

“A resurgence of more infectious mutations in the virus poses significant risks to Indonesia’s economic recovery,” Moody’s said in the report. It will also “challenge the government’s plans to reduce the budget deficit to pre-pandemic levels, a credit negative.”

S&P Global Ratings made similar comments days earlier, warning in a July 15 report that Indonesia’s “existing credit buffers on ratings will be removed if persistent lockdowns are extended.”

On Tuesday, Indonesia’s President Joko Widodo announced an extension of the pandemic-related restrictions, which should end on July 25, Reuters reported.

Unfortunately, given the poor vaccine adoption, the potential for Indonesia to reach pre-pandemic levels is likely to be pretty slim right now.

Darby said Indonesia’s situation needs to be put in context: the country’s balance of payments is “actually very good,” he said, adding that its foreign exchange reserves are near record highs. In addition, the Indonesian economy is experiencing “quite a decent manufacturing revival”.

Still, he admitted that controlling Covid will likely prevent Indonesia from reaching its full economic potential. The country is lagging behind in its vaccination efforts worldwide – according to Our World in Data, only 5.95% of the Indonesian population were fully vaccinated as of July 18.

“The reality is that … you probably won’t reach your full economic potential until you have some kind of herd immunity,” Darby said. “Unfortunately, given the poor vaccine adoption, the potential for Indonesia to reach pre-pandemic levels is likely to be pretty slim right now.”