Covid-19 outbreaks leave Southeast Asia with little policy space
LAST YEAR Many countries in Southeast Asia have been praised for avoiding large epidemics of covid-19, even though they saw a sharp decline in production. They did not come out unscathed this year. While widespread vaccination can limit the spread and severity of the Delta variant across much of the wealthy world, the vast majority of Southeast Asians still don’t get bites. Indonesia, Malaysia, Myanmar and Thailand are reporting more cases than ever. Daily new cases in Vietnam are three times the annual total for 2020.
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High-frequency indicators suggest that the upsurge in cases has weighed on economic activity. Google’s daily mobility figures suggest people in Indonesia and Vietnam are spending more time at home than they did during epidemics last summer. The most reliable indication of the scale of the economic impact may come from Malaysia, which was hit by a new epidemic shortly before its neighbors. There, the manufacturing purchasing managers index, an indicator of the sector’s activity, fell to 39.9 in June, the lowest since April 2020. (A figure below 50 indicates a contraction.)
On July 20, the Asian Development Bank (ADB) has downgraded its growth forecast for Southeast Asia. He now expects an expansion of 4% this year, down from an earlier forecast of 4.4%. That may not sound so bad, given the scale of the public health disaster. But this means that the region is not expected to return to its pre-pandemic production level by the end of 2021. Some countries, moreover, will suffer much more than others. And they have fewer tools available to soften the blow.
Vietnam was perhaps the luckiest. The country’s merchandise trade accounts for 201% of its GDP, third in the world after the free trade ports of Hong Kong and Singapore. Growing demand for consumer goods from confined Westerners has helped the country experience one of the fastest recoveries in the world and made it one of the few economies to thrive in 2020. Although the ADB trimmed its 2021 growth forecast for Vietnam, it is still among the highest in the region, at 5.8%.
In contrast, Thailand suffered without tourists, whose spending accounts for about a fifth of the country’s spending. GDP. The economy shrank by more than 6% last year, and the ADB expects growth of just 2% this year. Faced with this dire economic situation, Phuket has reopened its doors to some vaccinated foreign tourists, a move that Thailand’s prime minister Prayut Chan-o-cha bluntly called a “calculated risk” last month. The Indonesian government’s decision to ease lockdown restrictions from July 26, when cases are still dangerously close to their peaks, also illustrates the tough choices many middle-income countries face.
Yet reopening at home alone cannot restore economic normalcy. The recent epidemics have also dashed any hope of resumption of tourism from China. Chinese visitors made up between a quarter and a third of tourists to Cambodia, Myanmar, Thailand and Vietnam before the pandemic. Beijing’s reluctance to open its borders, which could persist until next year or beyond, is adding to the economic pressure.
Meanwhile, the region’s central banks are less able to fuel domestic demand and cushion the impact of epidemics than they were at the start of the pandemic. Last year, interest rates were lowered to historically low levels in most emerging markets. The central banks of Indonesia and the Philippines have even joined with those of rich countries in pursuing modest bond buying programs. Nothing like that seems likely this time around. The region’s currencies stumbled as sales accelerated over the past month. In May, Thailand recorded its biggest current account deficit in eight years, leaving little room for the country to cut interest rates for fear of discouraging foreign capital. The combination of more covid-19 and less political space will make the return to normalcy much more difficult than it seemed a few months ago. ■
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This article appeared in the Finance and Economics section of the print edition under the title “Circled in”