Asean's next move
As countries in the region learn to live with Covid, the focus turns to steering their economies into a more challenging future.
published : 29 Nov 2021 at 04:30
newspaper section: Asia focus
writer: Nareerat Wiriyapong
The coronavirus pandemic has taken a severe toll on Asean countries again this year, with millions infected and tens of thousands of fatalities. While the worst of the surge appears to have passed, recovery will depend on pandemic management, especially the pace and efficacy of vaccinations, and response to the risks of new variants emerging.
As more people get vaccinated, there is a clear shift in the region as governments transition from "zero-Covid" policies to treating Covid-19 as endemic. Singapore -- the first Southeast Asian economy to achieve high vaccination levels given its small population size -- declared in June that it was time to start learning to live with the virus. The city-state has since moved to gradually loosen travel restrictions, including travel lanes with selected countries.
Its neighbours -- Malaysia, Indonesia and Thailand -- have since last month followed suit, reopening sectors of their economy starting with tourism, with some restrictions still. Although the path ahead will be difficult, reopening is essential because the cost of staying locked down is too high, economically and socially.
"This is a point at which these countries have either explicitly, like Singapore and others, or implicitly recognised the need to move from the pandemic approach of trying to get to zero to an endemic approach," said Associate Professor Simon Tay, chairman of the Singapore Institute of International Affairs (SIIA).
"With safeguards, we can really learn to reopen the economy. In Singapore, we talked about not just recovery but emerging stronger. That's the government's task, in a way that aligns to the new economy," he added.
The Asean economy, experts say, will benefit from the increase in global demand and supply chains that run through the region. Additionally, there is a silver lining from US-China competition as the two superpowers seek to invest and develop closer relationships with Asean and its member states.
"Asean in a way will start to move toward a new normal to work together again. That would be helped by external demand as Europe and America have opened and China has been relatively unaffected so far," Assoc Prof Tay noted at a recent virtual forum organised by the SIIA.
"With safeguards, we can really learn to reopen the economy. In Singapore, we talked about not just recovery but emerging stronger," says Simon Tay, chairman of the Singapore Institute of International Affairs. SUPPLIED
Steve Cochrane, chief Asia Pacific economist at Moody's Analytics, said the easing of movement restrictions is going to have a huge impact on the region, allowing Asean to catch up with North Asia.
"The strengths in Asia in terms of the pandemic economy have been in (South) Korea, Taiwan and China until recently, before some factors perhaps caused the slowdown in economic activity in China. But we will certainly see acceleration," he said.
In much of Asean, he said, one of the biggest casualties of the pandemic has been small and medium-sized industries, in sectors such as retail and services, that served the local economy. But the expected quick turnarounds in spending will benefit this group.
"Of course, this region has a large and growing middle class with some savings available, and as soon as they can get out, they will spend and that will benefit the economy," he said. "But those countries where the impact on small enterprises has been the greatest may see a little bit of a slower rebound."
Each country has strengths and weaknesses, said Dr Cochrane. Singapore and Malaysia, for example, are strong in providing fiscal support to small businesses and unemployed households so there should be additional savings or additional availability of either individuals or small businesses to go out and spend. "That may not be the case so much, say, in Thailand and Indonesia," he noted.
"I do think one of the real strengths of the region, which improved its durability over the last 18 months or so, has been the export side of the economy," he said.
"Exports have been a foundation that has kept the Asean economy from sinking deeper than it might have. The supply chain has also been resilient and active, and I think that will continue to drive the economy forward."
Overall, foreign investors continue to show interest in Asean. A survey of senior executives at 40 US companies, commissioned by Standard Chartered in July and focusing on the US-Asean Corridor, revealed that US companies expect robust business growth in the region over the next 12 months, with 93% of respondents expecting an increase in revenue and 86% anticipating an expansion in production.
Investment numbers are indeed set to recover, judging by approvals of new projects across the region that will create more employment opportunities.
Dr Cochrane said that going forward, investors are going to be looking at how well different countries manage the pandemic, and whether they can "turn on a dime" to deal quickly with unforeseen situations.
In Vietnam, for example, the rapid pace of infections caused a shutdown of export-oriented industries as authorities doubled down on social distancing. Yet, GDP was very strong. "That is a perfect example of a well-managed pandemic economy turning into a real problem this year."
DIGITAL SILVER LINING
Responses to the pandemic have hastened the adoption of digital technology across the region. From utilising technology for contact tracing to purchasing goods primarily online and embracing remote work, digitisation has permeated every domain of life.
For governments, technology has proven critical in helping manage the pandemic amid lockdowns and other restrictions. For companies across Asean, meanwhile, digitisation plans have gone from "nice-to-have" to "must-have".
According to a report launched earlier this month by Google, Temasek and the consultancy Bain & Co, since the pandemic began, 60 million Southeast Asians have become digital consumers: people who have used at least one service online, from groceries and food delivery to online entertainment and finance. There are now 350 million digital consumers across Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
A large proportion of the region's internet users came online relatively recently. The total online population in the six countries in 2015 was 260 million, compared with 440 million today, the report said.
Thailand has seen 9 million new digital consumers since the start of the pandemic in 2020, 67% of whom are in non-metro areas, the report found. Activity in most sectors accelerated with double-digit year-on-year growth. Looking toward 2025, the overall internet economy will likely reach US$57 billion in value, with a 17% compound annual growth rate (CAGR).
Digital financial services are also becoming critical enablers, with 96% of online merchants now accepting digital payments and 82% adopting digital lending solutions.
"One of the silver linings is really the acceleration of the digital economy within Southeast Asia: the uptake of people going digital, digital finance, the rise of e-commerce, although it has implications for the ability of the supply chain to meet that demand," said Lee Chen Chen, associate director and senior fellow at SIIA.
Governments' commitment to the digital economy is clear, she said. Vietnam, for instance, has declared the acceleration of digital economy one of its core strategies. Thailand, meanwhile, aims to become an Asean digital hub that could challenge Singapore.
"Exports have been a foundation that has kept the Asean economy from sinking deeper than it might have," says Steve Cochrane, chief Asia Pacific economist with Moody's Analytics. SUPPLIED
"It's great to see that there is almost quite a consistent approach … to really ramp up the whole digital economy, also as a way for them to pull out of the current doldrums that the economy is facing," said Ms Lee as she presented the SIIA report entitled From Crisis to Endemic: Stumbling or Pressing Ahead?
The report indicated that the digital economy is especially promising in Indonesia given its large population. Internet penetration rose from 64.8% in 2018 to 73.7% in the second quarter of 2020.
A report from Indonesia's Ministry of Finance and the Asian Development Bank (ADB) suggests that technological transformation could add $2.8 trillion to the economy by 2040. The e-Conomy SEA 2021 report by Google, Temasek and Bain forecasts Indonesia's digital economy in 2025 will reach a gross merchandise value of roughly $125 billion, out of an Asean total of $363 billion.
To capitalise on this, the SIIA report said Indonesia must improve its information technology (IT) infrastructure. Southeast Asia's largest economy ranked 112th out of 138 countries in the Speedtest Global Index for fixed broadband speed as of October 2021. Singapore and Thailand were first and second respectively.
Underdeveloped digital infrastructure and increasing protectionism prevent Indonesia from reaching its full potential in the digital economy, the report said. Relative to Asean, Indonesia continues to lag in 5G technology to fully support the wide and deep penetration of the internet.
Dr Cochrane of Moody's said that linking the digital economy across Asean will continue to be a high priority in terms of digitisation of financial services.
Infrastructure will be critical to keeping the momentum going, he said. "Every country in Asean had active infrastructure development plans. That is really key in creating potential for very long-term productivity that there's going to be global competition for foreign direct investment going forward.
"There can't be any letup or any hesitation in continuing infrastructure development plans. Fortunately, most of the region has pretty good fiscal space so they have an ability to finance these kinds of projects," he pointed out.
Finally, this is a real opportunity for the region to think about investment in green technology and decarbonisation. These are also areas where there will be a lot of competition and opportunities to prove capabilities in terms of investment and innovation in green infrastructure, added Dr Cochrane.
SIIA's Ms Lee agreed, saying that there is also a real opportunity for a green reset.
"We are already seeing it within the financial sector and within the governments," she said. "I'm really pleased to see the government even last year announced the Singapore Green Plan 2030."
The state investment arm Temasek recently committed to reducing net carbon emissions of businesses its portfolio to half the 2010 levels by 2030. It also aims to reach net zero emissions by 2050.
"I think that is going to have repercussions on a lot of sectors, not just in Singapore but also across the region," she said.
EYE ON POLITICS
The pandemic has placed considerable social and political stresses on Asean countries. Malaysia and Thailand are potentially in more challenging situations. In both, intense and divisive political confrontation between incumbent governments and opposition forces was on the rise even before the lockdowns of 2020.
Confidence in government was further shaken as a result of the surge of infections this year. Voices of dissent have intensified, criticising authorities' alleged poor handling of the pandemic.
"The countries really being watched in terms of political stability or instability are Malaysia and Thailand," said Ms Lee. "Malaysia as we know just had a sudden change in political leadership in the last couple of months."
The opposition and the current government in Malaysia have reached an agreement under which the former will support the latter in Parliament on key votes.
"We do not anticipate things to change much, and we can expect to see a bit of more sort of the policy flip-flopping as a result of infighting among the government," said Ms Lee.
Thailand is another country to watch because there are challenges to Prime Minister Prayut Chan-o-cha's leadership -- including from within the party that originally backed him for the top job. "At the same time, there are challenges externally among the public, young Thais who are very disenchanted with what they see as a corrupted government that does not have political legitimacy to rule the country."
In Indonesia, the approval rating of President Joko Widodo has been on the decline, partly from the perception that his administration has botched the management of the pandemic. "Notably, the government has been criticised for its belated public health measures, lacklustre testing and contact tracing efforts, as well as initial delays in vaccination programmes," the SIIA report said.
"The countries really being watched in terms of political stability or instability are Malaysia and Thailand," says Lee Chen Chen, associate director and senior fellow with the Singapore Institute of International Affairs. SUPPLIED
One-party Vietnam, on the other hand, is seen as one of the most politically stable countries in Asean despite changes in key posts since the start of 2021.
"What really stands in Vietnam's favour is obviously politics," said Ms Lee. "The country just announced a new political leadership with the national assembly election in the middle of this year and Prime Minister Pham (Minh Chin) is also the head of the national task force that oversees the pandemic response.
"In that category, Vietnam should have the political leadership to steer the country through the current Delta wave."
The SIIA report, however, noted that beyond the domestic agenda, leadership in Vietnam will face pressures from growing tensions between the United States and China.
"The stated policy (of the Vietnamese government) is to engage both sides and not to choose between them. Notably, however, ties with the US in recent years have grown, both in economic and in political and security relationships," it said.
"With China, there are further complications. The two countries have competing claims to parts of the South China Sea and yet maintain strong ties, especially through their ruling Communist parties, and share a long border with many flows of trade and people."
Dr Cochrane said the success of governments in keeping the economy going, as well as communication of policy, will be among the factors that local people as well as foreign investors will keep an eye on.
"They will look for policymakers who can be very clear in terms of communicating the policy so we all know what we face because there will be difficulties again. There will be another Covid-alike coming through somehow, somewhere," he said.
"My expectation is that policymakers throughout the region will do better in handling it because we've got a lot of experience of it with each subsequent wave, along with the learning curve of policymakers in the region," he concluded.