Don’t Get Too Excited About a Post-COVID Economic Recovery for Southeast Asia

It appears that a good number of people still believe there will be a “post-COVID-19 era” – and it might arrive with a vaccine by the end of the year. It would be wiser, however, to do away with such wishful thinking for now. There may never be a “post-COVID-19 era,” just as there is no “post-AIDS era” or a “post-influenza era.” No vaccine has been discovered for a good number of infections and viruses, after all. Scientists may find a vaccine for COVID-19 next year; just as likely, however, is the possibility that they will never discover a vaccine or the virus mutates into a different strain.

At present, Southeast Asian governments are rallying themselves to weather one terrible year of economic growth, with the hope that things will return to normal in 2021. An Asian Development Bank (ADB) report released in June forecasts the Southeast Asia-wide economy will contract by 2.7 percent this year before growing 5.2 percent in 2021. For many, that might be comforting: not as good as pre-coronavirus rates, but not awful. But let’s remember one thing: If an economy was to, say, contract by 2.5 percent in 2020 and then grow by 2.5 percent in 2021, that doesn’t mean the economy in 2021 will be on par with its level in 2019. Year-on-year growth figures, after all, can be misleading.  

“While we see a higher growth outlook for the region in 2021, this is mainly due to weak numbers this year, and this will not be a V-shaped recovery,” explained ADB Chief Economist Yasuyuki Sawada in a statement. Indeed, any hope of the fabled “V-shaped” recovery should be put to bed. We aren’t going to get back to where we were in 2019 by 2021. At best, Southeast Asian economies won’t recover to pre-COVID-19 economic levels until 2022 – and some might take even longer.

As a general rule, we can disregard any economic forecast not made in the last month or two. Indeed, it ought to be noted how rapidly almost all forecasts tumble within a month. The ADB’s forecast in June downgraded Vietnam’s growth rates by 0.7 percentage points from its forecast made just two months earlier, from 4.8 percent to 4.1 percent. It wouldn’t be surprising, then, if forecasts are downgraded again when new projections are made in two months’ time. And there’s no certainty that this trend won’t continue until the end of the year.

Thinking that things will quickly get back to normal is comforting, but not accurate. A government can instruct people to go back to work, for instance, but it cannot instruct them to go to shopping malls or restaurants or cinemas. Neither can governments instruct people to travel abroad, especially to countries that they consider unsafe. It’s fanciful to imagine that people won’t change their behavior after such a massive health scare. One problem during economic crises is that people tend to behave in ways that economists don’t want. After a crisis, economists often think people should be greedy, ready to spend, spend, spend – boosting consumption and, therefore, productivity and output. But after the 2008 financial crisis, consumers and investors were fearful, preferring to save their money rather than spend it. The same might be the case after this pandemic. It’s not apparent if forecasts account for this.   

Look at it whichever way you want, but we’re heading into a world of unknowns. For starters, there is no telling whether another major wave of the pandemic will hit Europe and the United States later in the year. If serious enough, this could force those countries to shut down their economies once again, hammering their imports from Southeast Asia and this region’s tourism sectors. Another wave of the virus, after all, is now circulating in Beijing. And neither is there any guarantee that Southeast Asia won’t see yet another wave of infections itself. If not handled properly, that could necessitate another round of shutdowns of economies and free movement across the region.

Other unknowns should be considered. Southeast Asian economies were rather fortunate that the 2008 financial crisis and the global recession took place at the peak moment of globalization, meaning Western firms were still happy to relocate their operations overseas. It was also during this time that China really began to expand its global investment program. Today, though, it’s more than likely that Western countries will embrace more protectionism in the coming years, while it’s still up in the air as to whether China can afford to invest overseas as much as it did in the pre-COVID-19 era. This will only become apparent in the coming months.  

Another unknown that will only become clear later is what happens when government bailouts cease. As I’ve said before, most of the “stimulus packages” doled out by Southeast Asian governments aren’t stimulating anything. Instead, they’re “survival packages” intended to keep companies and sectors afloat during the crisis, but these recipients could fail once the handouts end. Just how many of these so-called “zombie companies” there are in Southeast Asia hasn’t been properly assessed, but that will soon become apparent as economies are beginning to restart. 

One danger is that these unviable enterprises continue to leech off the state for much longer than they should, as governments are fearful of letting so many firms collapse, because of the effects on employment and poverty rates. Another concern, as put recently in the Nikkei Asian Review, is “if zombie companies are allowed to survive, they may cling on to talented workers and valuable businesses, reducing opportunity for others.” Indeed, countries like Vietnam and Laos have been trying for years (mostly unsuccessfully) to jettison their wasteful state-owned enterprises, and now could be pressured to take responsibility for even more wasteful firms in the private sector.

As this might make clear, there are some economic conditions that will only become apparent once economies get back to life. 

Another question is the health of the region’s banking sectors. This ought to be a major concern, especially in Cambodia. If the ending of government bailouts happens to coincide with the collapse of “zombie companies” at the same time as banks begin actively recouping their losses, it could set off a panic in the financial sector.

The last unknown I’ll speak of is what happens as economic conditions diverge between Southeast Asian states. For sure, the recent decade has seen startlingly large growth rates in Cambodia, Laos, and Vietnam, while the likes of Thailand and Malaysia have rather naturally fallen behind the pace. But the economic differences between countries are now set to be starker. The ADB expects Thailand’s economy to contract by 6.5 percent this year and the Philippines’ by 3.8 percent. But Vietnam’s economy is expected to actually grow by 4.1 percent. What happens in the region, in terms of migration, cooperation, investment, and even security, if some countries prosper and others falter in years to come, as gaps widen to levels unknown for decades? Increased competition amongst desperate economies doesn’t always make for peaceful times.