Economic outlook 2021: Beware of prolonged recession

Content image - Phnom Penh Post
A general view shows Tanjung Priok port in Jakarta, Indonesia. afp

The year 2020 has been very challenging, but 2021 is not going to get better anytime soon. In 2020, global economic growth was projected to contract by 4.9 per cent with the US suffering negative growth of eight per cent, Europe minus 10.2 per cent, Japan minus six per cent and Indonesia minus two per cent. China is probably the only country that will record positive growth, projected at 1.2 per cent.

The invention of vaccines may help one-third of the population to return to their normal activities but only at the rate of 60 to 70 per cent compared to before the pandemic. In addition, the incoming Joe Biden administration may embrace the multilateral system. But these will not necessarily solve all the problems. The world is facing one year of a serious economic downturn, and it will take at least three years for the world to recover.

Covid-19 has brought the worst economic impacts in the modern era, hitting the world from both the demand and supply sides simultaneously. As of the end of 2020, Covid-19 has infected more than 1.2 million people in Southeast Asia, with a mortality rate of 2.43 per cent. Indonesia recorded a mortality rate of three per cent – among the highest in the world.

It has caused more than 30 million people in ASEAN to become unemployed, pushing about 18 million people into poverty, of which three million are in extreme poverty. Covid-19 has hit the ASEAN economy from at least three channels: lower global demand has decreased ASEAN’s exports; dry capital markets have reduced foreign direct investment (FDI) into ASEAN; and sluggish tourism has hit the services sector and many small and medium enterprises (SMEs).

Most ASEAN countries have experienced recession in 2020. In the best scenario, the ASEAN economy would contract by 2.7 per cent in 2020, and will only grow by three to four per cent in 2021 when global growth is expected to be about three per cent.

Although Indonesia recorded a slight pickup in the third quarter of 2020 as it decreased the negative growth to 3.5 per cent from minus 5.3 per cent in the second quarter, this should not make us complacent for three reasons.

First, nonperforming loans have been increasing, reaching the highest level since the global financial crisis. The nonperformance rate went from 2.6 per cent of total loans in 2010 to 3.2 per cent in September 2020.

Second, FDI has not improved. FDI totalled only $20 billion in 2017 and 2018, and up slightly to $23 billion in 2019. Domestic investment is still struggling.

Last, it is true that Indonesia recorded a trade surplus of $13.5 billion between January and September last year, but the surplus was driven by a sharp decline in imports instead of an increase in exports. Imports declined by 18 per cent and exports declined by 5.8 per cent. What concerns us is that the decrease in imports was largely driven by decreases in imports of machinery and raw materials, which will be translated into decreased industrial production this year and may cause a significant number of workers to be laid off.

The Biden administration may help bring the US back onto the right track of multilateralism, but this does not mean that world trade will be back to the levels seen prior to the crisis anytime soon.

President-elect Biden could take immediate action to restore the multilateral trading system including: (1) removing Section 232 of the national security measures including health measures imposed by Donald Trump, which will facilitate trade in goods, and (2) vetoing a new judge in order to give life to the currently not-functioning Dispute Settlement Body as well as appointing Ngozi Okonjo-Iweala as the director-general of the World Trade Organisation (WTO). However, the key principle embodied in the WTO of “a single undertaking – nothing is agreed, until everything is agreed” has resulted in slow progress in all WTO decisions, which will not help the rapid recovery of world trade.

In the meantime, while 15 East Asian countries just sealed the biggest regional trading block with the signing of the Regional Comprehensive Economic Partnership (RCEP), the US seems unlikely to join Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). While there may be a strong willingness from Japan, Australia, Singapore and Vietnam to bring back the US into the CPTPP, US domestic pressures may be strongly against it.

Given Indonesia’s domestic issues of rising NPLs, stagnant FDI and domestic investment, declining imports of machinery and raw materials, as well as a global economic slowdown and the fact that world trade is not going to be better soon, the Indonesian government should not do business as usual, but should conduct a massive transformation.

First is stimulus. It is crucial to improve the implementation of stimulus to revive domestic consumption and thus trigger a return of business back to normal. Stimulus is key to boost domestic consumption until next year.

It is vital to target the right beneficiaries. If we fail to make good corrections, we will be trapped in a prolonged recession. We should ensure Covid-19 social safety nets work effectively and efficiently, but only temporarily. We should allocate tax incentives to productive activities, not consumption goods. It is a must to ensure fiscal and monetary stimulus is well targeted and well disbursed.

Indonesia should also prepare to provide another significant fiscal stimulus in 2021 given the fact that unemployment will remain the same and business will not be not back to normal; and we have to increase the disbursement rates of fiscal and monetary stimulus, and ensure the programmes are “purely social and not political”.

Second, Indonesia needs to improve its trade and investment climate by streamlining export-import and investment procedures. We should also optimise the use of the Preferential Trade Agreements (PTA).

Japanese, Korean, and Taiwanese have been looking for FDI relocation and have considered Indonesia as a good alternative. However, we have not seen any success stories of these reallocations so far. Indonesia should make massive reforms, not only online procedures and obtaining certificates of origins, but also the automatic licensing systems in place.

Lastly, at national and regional levels, we need to work on streamlining Non-Tariff Measures (NTMS). In the 10 ASEAN countries, applied tariff rates have declined from nine per cent in 2010 to 4.3 per cent in 2020, but the number of NTMs increased from 1,635 to 9,502 measures over the same period.

Lili Yan Ing is lead adviser for Southeast Asia region, Economic Research Institute for ASEAN and East Asia (ERIA).