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Two Countries, 232,851 Cases and One Big Problem

Two Countries, 232,851 Cases and One Big Problem

Friday, 7 August, 2020 - 04:30

A lot of things were going right in Southeast Asia’s two great archipelago nations before the coronavirus came around. Indonesia and the Philippines had relatively robust economies tended by well-regarded policy makers, and the benefit of young, educated populations. Both countries were poised to become bigger regional forces in the decades to come.


Indonesia and the Philippines took different approaches to battling Covid-19, but the outcome has been the same: deep growth contractions and signs that recoveries — when they do come — will be shallow. These countries were always going to take a hit, given the way global growth has incinerated. Yet they also suffer from home-grown missteps and submerged logs that made a terrible situation worse.


Indeed, the numbers paint a grim picture. The Philippines reported Thursday that gross domestic product shrank 16.5% from a year earlier, the biggest plunge ever and far worse than forecast. A day earlier, Indonesia recorded a fall of 5.3%, the most since the Asian financial crisis tore the country apart in the late 1990s. Both are also vying for the unhappy mantle of the most coronavirus infections in the region: Indonesia has 116,871 cases and the Philippines 115,980 as of Wednesday.


Then consider some of the preexisting conditions. Commercial life is concentrated in tightly packed metro regions — Jakarta and Manila — beset by poor infrastructure and an underdeveloped healthcare system. In a cruel twist, neither is anchored in the global supply chains that buttress neighbors Malaysia, Thailand, Singapore and Vietnam. That ought to mean less exposure to the collapse in global demand. In practice, it hasn't offered much of a cushion.


The most obvious lever to pull is fiscal policy. Yet Jakarta doesn’t appear up to the task: Only about 20% of additional spending earmarked to address the pandemic made its way into the economy. Jokowi has complained of red tape and a lack of urgency on the part of bureaucrats in charge of disbursing cash. Indonesia's GDP showed a decline in government spending in the most recent quarter. In a briefing Wednesday, top officials pledged more outlays to put a floor under activity.


Somehow the government is still clinging to the idea of escaping a full-year contraction, with the growth forecast between a decline of 0.4% and an expansion of 1%. That looks like wishful thinking.


The signature policy of President Joko Widodo, known as Jokowi, has been bolstering infrastructure. That's floundering, too. Fixed capital formation tumbled 8.6% from a year earlier, as workers stayed home from factories and the supply of materials fluctuated. This is a real danger sign. Infrastructure is vital to Indonesia’s future; its deficiency challenges Jokowi's ambition to rid the economy of its constraints and position it as one of the region’s most consequential in the 21st century.


While the lapses aren’t as egregious in the Philippines, politicians could be doing a whole lot more. Government spending increased 22% last quarter, one of the few areas of the economy to point upward. Even so, lawmakers are still deliberating a spending plan and a proposed corporate income tax cut that President Rodrigo Duterte hopes can support families and businesses hit hard by the pandemic. The amount the Senate has proposed — 140 billion pesos ($2.9 billion) — is far less than what governments elsewhere in Southeast Asia are providing.


The republic is a great exporter of labor, with remittances usually accounting for about 10% of GDP. The virtual cessation of international travel and rising joblessness in host countries have put the brakes on money sent home from abroad. Domestic helpers in Singapore say they are supporting entire villages now. That means paying for food, shelter, medicine and education. This dry tap is one reason consumer spending sank 15.5%. Social distancing has also put shopping on hold. That was particularly true in the Philippines, where the Manila area and the main island of Luzon locked down hard and early. Indonesia didn't go for anything as comprehensive, relying on patchwork local initiatives and curbs on domestic travel during national holidays. That relative laxity probably spared the economy a double-digit dip. But with millions at risk of falling back into poverty, it’s cold comfort.


Bloomberg


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