Economic Impact of the COVID-19 Social Restriction Policies in ASEAN Emerging Countries
Cesario Iriansyah1*, Dewi Hanggraeni1
1 Faculty of Economics and Business, Universitas Indonesia, Jakarta, Indonesia
*Corresponding Author: [email protected] Accepted: 15 July 2021 | Published: 1 August 2021
_________________________________________________________________________________________
Abstract: The social restriction policy is one of the government policy responses in facing the COVID-19 pandemic which has caused concern around the world. This policy is expected to hold the spread of COVID-19 but also be considered to affect the economy. This study examines stock market reactions in ASEAN emerging countries to the social restriction policies using the panel data regression method. The results show that the increased intensity of social restrictions policies negatively affect stock market returns in ASEAN emerging countries.
These results prove that the social restriction policies which are considered a critical action in dealing with the COVID-19 pandemic are counterproductive to the stock market performance.
Keywords: Stock market, COVID-19 pandemic, Social restriction policies, Emerging markets ___________________________________________________________________________
1. Introduction
COVID-19 is a disease caused by the Severe Acute Respiratory Syndrome Coronavirus-2 (SARS-CoV-2). Transmission of this virus can easily happen from person to person and it causes concern all over the world. The World Health Organization (WHO) officially declared a pandemic status on March 11, 2020. This health crisis event has become a threat to the global economy (Aslam et al., 2020). The stock market, which is an important part of the economy, has the potential to be directly affected by this pandemic (Pandey & Kumari, 2021; Harjoto et al., 2020).
The increase in COVID-19 cases has prompted the government to intervene by implementing social restriction policies. Those policies have a direct impact on disrupting economic activity, so they are considered detrimental to the stock market (Zaremba et al., 2021; Ftiti et al., 2021).
Alvarez et al. (2020) argue that implementing social restriction policies can cause economic costs that need to be considered. Ursin et al. (2020) argue that those policies can also cause social costs. Even so, implementing those social restriction policies is considered able to reduce the COVID-19 case growth (Greenstone & Nigam, 2020; Barrot et al., 2020).
The emerging market is a broad term that can refer to countries that are involved in political, social, and economic evolution and are also experiencing rapid economic growth (Saccone, 2017). Walker et al. (2020) argue that emerging markets will be more strongly affected by the COVID-19 pandemic due to a lack of health infrastructure. Janus (2021) also states that emerging markets are more vulnerable to crisis shocks and will experience a more significant impact than developed markets. That makes emerging markets require appropriate policy strategies in dealing with the pandemic. This study examines stock market reactions in ASEAN emerging countries to the social restriction policies using the panel data regression method. So,
a deeper understanding about the effect of implementing social restriction policies in response to the pandemic will help the emerging country governments design better policies in the future.
2. Literature Review
2.1. Stock Market during COVID-19 Pandemic
Based on the supply of stock market returns hypothesis, Harjoto et al. (2020) state that the adverse shock on a country's economy during the COVID-19 pandemic will impact the negative performance of stock markets. Contessi & Pace (2021) found statistical evidence that the COVID-19 pandemic had caused stock market instability transmission from China and potentially affecting other countries. In line with that, Pandey & Kumari (2021) found that the COVID-19 pandemic significantly negatively affected the global stock market and the Asian stock market had the strongest impact. The COVID-19 pandemic has increased uncertainty to a high level and affected financial market performance (Lyócsa et al., 2020). Financial markets have reacted by increasing volatility, decreasing returns, and decreasing liquidity (Harjoto et al., 2020; Okorie & Lin, 2021). Smales (2021) even mentioned that this pandemic caused a stock crash in March 2020 and Omane-Adjepong & Alagidede (2021) state that this condition brought investors to face a bear market. Al-Awadhi et al. (2020) state that the COVID-19 confirmed and death case growth negatively affect the stock market returns, while Ashraf (2020a) argue that only the case growth affects the stock market. Hanke et al. (2020) state that the COVID-19 pandemic affects financial market expectations through risk densities. In line with that, Landier & Thesmar (2020) found that the implicit discount rate increased from 8.5%
in mid-February to 11% at the end of March, and forecast earnings in 2020 decreased progressively by 16%.
2.2. Social Restriction Policies during COVID-19 Pandemic
The increasing number of COVID-19 cases has prompted the government to intervene and gain control over the pandemic. Implementing government non-pharmaceutical interventions through social restriction policies is also considered to hurt financial markets (Zaremba et al., 2021; Ftiti et al., 2021). Kumar et al. (2021) state that implementing stricter and longer social restrictions policies would negatively affect economic growth. The implementation of that policy also generates social costs that need to be considered in its implementation (Ursin et al., 2020). Alexakis et al. (2021) investigated the impact of social restriction policies on the stock market index and found that these policies are proven to have a direct and indirect negative effect on stock market returns. Zaremba et al. (2021) found that implementing social restriction policies through the closure of schools and workplaces has worsened stock market liquidity conditions. Shanaev et al. (2020) even state that the overall impact of intervention policies through social restrictions is the main driving factor causing stock returns to decline during the COVID-19 pandemic.
3. Data and Methodology
The object of this research is emerging countries that are also the Association of Southeast Asian Nations (ASEAN) members. Based on the classification of Morgan Stanley Capital International (MSCI) there are 27 emerging countries and 4 of them are ASEAN members, specifically Indonesia, Malaysia, Philippines, and Thailand. This study used data from the period January 22 to December 31, 2020, with total observation data of 878 sets. Table 1 shows the distribution of observation data in this study.
Table 1: The distribution of research observation data
Country First COVID-19 case Stock index Observations
Indonesia 02 March 2020 JKSE 198
Malaysia 25 January 2020 KLSE 231
Philippines 30 January 2020 PSI 222
Thailand 13 January 2020 SETI 227
Total 878
This study used the Ordinary Least Square (OLS) pooled panel regression model and the research model is shown in equation 1.
𝑅𝑖,𝑡 = 𝛼0 + 𝛽1𝑑𝑆𝐼𝑖,𝑡 + 𝜀𝑖,𝑡 (1) The subscript t indicates the daily period, the subscript i indicates the country, α0 is the constant term, and ε is the error term. Variable R is the dependent variable and represents the stock market return which was calculated by the daily percentage change of the main stock index value. The main stock index values from each country sample were obtained from Thomson Reuters Eikon. Variable dSI is the independent variable and represents the daily intensity changes of social restriction policies. The measurement of the intensity of social restriction policies used the stringency index from the Oxford COVID-19 Government Response Tracker database. That index consists of nine assessment indicators, specifically workplace closures, school closures, cancel public events, restrictions on gatherings, close public transportation, stay at home, public information campaigns, restrictions on internal movement, and international travel controls. The robustness test was conducted with two models. The first used country fixed-effects dummy variables as in equation 2.
𝑅𝑖,𝑡 = 𝛼0+ 𝛽1𝑑𝑆𝐼𝑖,𝑡 + ∑ 𝛽𝑐 𝐶𝑐
𝑐−1
𝑐=1
+ 𝜀𝑖,𝑡 (2)
The second used macroeconomic, cultural, and institutional country-level and the COVID-19 case growth control variables as in equation 3. Information about the variables used in this research is shown in table 2.
𝑅𝑖,𝑡 = 𝛼0+ 𝛽1𝑑𝑆𝐼𝑖,𝑡 + 𝛽2𝐶𝑎𝑠𝑒𝑠𝑖,𝑡−1+ 𝛽3𝐺𝐷𝑃𝑖 + 𝛽4𝐼𝐹𝑖+ 𝛽5𝑈𝐴𝑖 + 𝜀𝑖,𝑡 (3)
Table 2: Variables
Variables Definition Data Source
Dependent variable:
Stock Return (R)
The daily stock market index return.
Ri,t=Index valuei,t− Index valuei,t−1
Index valuei,t−1
Thomson Reuters Eikon
Independent variable:
Intensity changes of social restriction policies
(dSI)
The daily change of stringency index.
dSIi,t= Stringency Indexi,t
− Stringency Indexi,t−1
OxCGRT website
Control variables:
COVID-19 case growth (Cases)
The daily COVID-19 confirmed case growth.
Casesi,t=Total casesi,t− Totasl casesi,t−1 Total casesi,t−1
John Hopkins University,Coronavirus Resource Centre website Gross Domestic Product
(GDP)
The logarithm of GDP in each country, to control the economic growth.
World Bank Investment Freedom (IF) The investment freedom index represents the level of
freedom to invest in local financial markets, to control the level of foreign investors’ convenience in the local financial market.
Heritage Foundation
Uncertainty Avoidance (UA)
The uncertainty avoidance index represents the level of tolerance for uncertainty, to control the level of investors’ uncertainty aversion.
Hofstede Insights
4. Descriptive Statistics
The statistical summary of the overall observation data is shown in table 3. As for the whole of emerging countries in ASEAN, the average daily stock market return value is 0.02%, the average daily COVID-19 case growth rate is 3.75%, and the average daily intensity change of the social restriction policy is 0.12 points. Table 4 shows the statistical summary based on each country sample. Indonesia is the sample country with the highest average daily stock market return and COVID-19 case growth. Thailand is the sample country with the lowest average daily stock market return and COVID-19 case growth. The country with the lowest average daily intensity change of social restriction policies is Philippines, while the highest is Thailand.
Table 3: Summary statistics Variable Observation Mean Standard
Deviation
Minimum Value Maximum Value
R 878 0.02% 1.81% -13.34% 10.19%
dSI 878 0.12 2.40 -22.23 34.26
Cases 878 3.75% 11.75% 0.00% 216.67%
GDP 878 11.72 0.19 11.56 12.05
IF 878 55.32 5.95 45.00 60.00
UA 878 47.97 10.40 36.00 64.00
Table 4: Summary statistics by country sample
Country Observations R Cases dSI
Mean Std Mean Std Mean Std Indonesia 198 0.057% 1.81% 4.80% 16.52% 0.04 2.45 Malaysia 231 0.023% 1.26% 3.36% 8.68% 0.16 3.11 Philippines 222 0.020% 2.15% 4.33% 12.26% -0.09 1.74 Thailand 227 -0.017% 1.94% 2.65% 8.47% 0.34 2.07
5. Results and Discussion
Table 5 shows the empirical test results of this study. Model 1 is the basic specification test of this study. The coefficient value of the intensity change of the social restriction policies is significantly negative. That result also indicates that the increased intensity of social restrictions negatively affects the stock market returns. That implies the stock market returns will decline as the increasing intensity of social restrictions. This finding is in line with Alexakis et al. (2021), Shanaev et al. (2020), and Ashraf (2020b). Model 2 is the robustness test by adding country fixed-effects dummy variables. Model 3 is the robustness test by adding macroeconomic, cultural, and institutional country-level and the COVID-19 case growth as control variables. The results of the regression coefficient and significance test of the robustness test show no difference, but the r-square value increased which indicates that model 3 can explain better the variation of the dependent variable. Model 3 shows that differences in macroeconomic, cultural, and institutional factors do not affect stock market performance.
Model 3 also shows that the COVID-19 case growth significantly negatively affects stock market returns. This result is in line with Harjoto et al. (2020), Al-Awadhi et al. (2020), Ashraf (2020a), and Topcu & Gulal (2020).
The government has responded to the COVID-19 pandemic by implementing the social restriction policies to hold the transmission of COVID-19, which is very easy and fast to spread, but Alvarez et al. (2020) argue that these policies can hurt the economy. Specifically, Gormsen
& Koijen (2020) state that implementing social restriction policies is expected to have an
impact on GDP growth because it directly impacts economic activities. That is evidenced by Barrot et al. (2020) which shows that the unemployment rate had increased in line with the increasing intensity of social restrictions. Harjoto et al. (2020) state that based on the supply of stock market returns hypothesis, adverse shocks that negatively affect the country's economic growth will also cause negative stock market performance. Implementing social restriction policies has been shown to negatively affect the stock market performance through increased volatility, decreased liquidity, and decreased returns (Wagner, 2020; Zaremba et al., 2021;
Ashraf, 2020b). That can happen because of the negative potential that can affect economic activity and generate negative sentiment in stock market investors (Haroon & Rizvi, 2020).
The COVID-19 case growth negatively affects stock market returns. That can happen because the increasing number of confirmed cases indicates that the intensity of the COVID-19 outbreak in an area is increasing. Zhang & Hamori (2021) and Baker et al. (2020) shows evidence that the COVID-19 outbreak is directly related to increased risk and causes stock market performance to decline through volatility.
Table 5: Impact of the intensity changes of social restriction policies on stock market returns
Variables Stock Market Return (R)
Model 1 Model 2 Model 3
dSI -0.0006**
(0.017)
-0.0006**
(0.017)
-0.0005**
(0.051)
Cases -0.0164**
(0.002)
GDP 0.0197
(0.896)
IF 0.0006
(0.904)
UA -0.0000
(0.705)
Country fixed-effects No Yes No
Constant 0.0003
(0.667)
0.0006 (0.647)
-0.2598 (0.898)
Observations 878 878 878
R-squared 0.0065 0.0067 0.0177
***Represent statistical significance at 1% levels.
**Represent statistical significance at 5% levels.
*Represent statistical significance at 10% levels.
6. Conclusion
This study examines the effect of the intensity changes of social restriction policies on stock market returns in ASEAN emerging countries from January 22 to December 31, 2020. The results of this study show that the intensity changes of social restriction policies have a significant negative effect on stock market returns. That implies the government's policy response in dealing with the COVID-19 pandemic by increasing the intensity of social restrictions will have a direct impact on decreasing stock market returns. Increasing the intensity of social restriction policies has proven to be counterproductive to the economy. A pandemic is an event that can happen at any time. Emerging countries that are considered more vulnerable to crises need in-depth knowledge about the impact of implementing policy responses including social restrictions. So, it can help the emerging country’s government design better policies in the future.
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