Post-pandemic economy of Southeast Asia: A slow-paced recovery
- Ananya Raj Kakoti is a field campaign associate with Indian-Political Action Committee (I-PAC) and a scholar of international relations, Gunwant Singh is a scholar of international relations from Jawaharlal Nehru University.
Much like the rest of the world, the Southeast Asian (SEA) economies were also severely impacted by the spread of Covid-19. The preventive measures of social distancing, lockdowns, and border closure have battered both internal and external demand in sectors such as retail, accommodation, and food services which form the core of many of the SEA economies. After a strong economic rebound in the first two quarters of the financial year 2021, the third quarter saw a contraction in growth caused by the recurring of Covid-19 in the form of the new Delta variant.
The economic losses borne by various SEA countries are varied. For example, the disruption of supply chains caused due to lockdowns and other Covid preventive measures are negatively impacting the countries which are dependent on merchandise trade, notably Singapore, Vietnam, Malaysia, Cambodia, and Thailand. On the other hand, travel bans and closure of public places have heavily affected countries that are dependent on services, especially tourism. Thailand and Indonesia are among those countries which were hit the worst. Countries that rely heavily on remittances like the Philippines are also hit hard due to a decline in remittances which ultimately resulted in the weakening of consumption and investment.
The labour market was another sector that was severely impacted by the Covid-19 containment measures. According to the International Monetary Fund (IMF)’s World Economic Outlook Database 2020, unemployment is expected to increase in Malaysia by 1.5%, in Indonesia by 2.5%, and the Philippines will also see a 2.5% rise in unemployment. Moreover, the lack of reliable income sources and social protection could push a significant population of the region into poverty.
In order to deal with the unprecedented circumstances, all the countries of the region have come up with fiscal packages to aid affected businesses and households, to the tune of 3.5% of individual countries' Gross Domestic Product (GDP). As some of the fiscal measures include wage subsidies which are provided to health responders and business employees. However, this increased spending amidst these weakened economic conditions will result in deteriorating fiscal health in these countries. According to an IMF estimate, fiscal deterioration for SEA economies could reach 15% of the GDP. Another worrying factor is the exponential increase in the public debt as countries are continuing to borrow and spend in order to spur economic growth.
Apart from borrowing, countries are taking different measures to support spending, for instance, Laos consolidated its fiscal budget, Cambodia is reprioritising its government expenditures. Vietnam is taking active steps to accelerate the disbursement of public investments.
After showing recovery for two first quarters of financial 2021, the Indonesian economy rose by 3.51% in Q3 from the previous year. This was significantly lower than the finance ministry’s forecast of 4.5% for Q3. In Q2 the GDP grew up to 7.7% due to declining Covid-19 cases, which was the highest in two decades. This slower pace of growth in Q3 is primarily due to the rapid surge in Covid-19 cases in July 2021 because of the Delta variant. Due to strict government restrictions, private consumption grew only by 1.03%. However, with the decline in the number of cases in the last month of Q3 the economy is expected to bounce back.
Malaysia also saw a 4.5% decline in its GDP, which was significantly lower than the previous quarter. This contraction in the GDP is significantly worse than the forecast of 1.3% contraction reported by Reuters. After rebounding from a pandemic-induced slump in Q2, the Malaysian economy grew slower due to the re-imposition of curbs that resulted in declining consumption and investment activities. However, the Malaysian Central Bank expects the economy of the country to quickly recover with ease in restrictions.
SEA’s second-largest economy, Thailand also saw its GDP declining by 0.3% year on year in Q3 of 2021. This was a sharp reversal from an upward trend which was seen in Q2 when the GDP grew by 7.6%. During this quarter, private consumption grew only by -3-2% as against 4.8% in Q2. Also, the fixed investment grew by -0.4% against 7.6% in the previous quarter.
The recovery of SEA economies will occur at a much slower pace than what was expected before due to the recurring waves of Covid-19. In its report, Asian Development Bank revised its growth forecast for the region from 4.4% to 3.1% for 2021. Moreover, it also downgraded the economic growth projection for all other SEA economies with the exception of Singapore and the Philippines. In their endeavour to bring their economies back on track, the countries will need to provide extra support to those sectors that have been worst hit by the pandemic. Also, they should continue finding new areas for growth. In achieving these goals, a conducive investment climate and infrastructural development will play a critical role. The behavioural shift of people towards digital technology aided by a pandemic will require governments to invest in digital skills which have now become pertinent.
All views are personal to the authors.
(Ananya Raj Kakoti is a field campaign associate with Indian-Political Action Committee (I-PAC) and a scholar of international relations, Gunwant Singh is a scholar of international relations from Jawaharlal Nehru University.)