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Southeast Asia's year of living dangerously

Governments will pay price of delaying tough reforms when the going was good

| Southeast Asia
Repatriated overseas Filipino workers arrive at an airport after weeks of quarantine in Pasay City on May 26: people are the Philippine main export.   © Reuters

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

It is hard to think of a region with a worse case of economic whiplash than Southeast Asia as COVID-19 upends 2020.

Just ask President Rodrigo Duterte of the Philippines, where growth cratered 16.5% year-on-year in the April-June quarter. Seven months ago, Duterte's economy was cruising at a China-like speed of around 6%. Now it is in its first recession in 29 years, struggling to maintain the gains of the past decade and reassure global investors rushing for the exit.

Then there is Indonesia's Joko Widodo, known as Jokowi, who is watching Southeast Asia's biggest economy shrink at a 5.3% clip. As 2020 began, the betting was on Jokowi redoubling efforts to improve infrastructure, reduce corruption and spread the benefits of rapid growth. Instead, Jakarta is struggling to avoid a return to the dark days of the 1997-1998 Asian financial crisis.

Tales of woe abound across the region. Plunging growth in Thailand is colliding with a strong currency, hurting exports. Malaysia is embroiled in political turmoil not seen since the '90s, distracting the government from nursing the economy. Singapore's 41.2% nosedive in the second quarter shows the extent to which Asia's economic year has been canceled.

There is a common thread: a complacency that is rapidly coming back to haunt many of the globe's most promising economies.

Making generalizations about Southeast Asia can be a fool's errand. All too many governments used the rapid growth of recent years as an excuse to shelve efforts to increase competitiveness and incentivize innovation. Booming exports convinced many leaders that the job was done.

The Philippines shows the folly of this dynamic. In 2016, Duterte was elected to supersize a revival drawing the world's attention. From 2010 to 2016, predecessor Benigno Aquino got under the hood of a long-neglected financial system. His moves to root out graft and increase tax collection scored the Philippines its first-ever investment-grade credit rating.

Six years was not nearly time enough to right a system still traumatized by two decades of rot under Ferdinand Marcos. And so Duterte's job was simple: turn Aquino's reforms up to 11. Voters figured Duterte's 22 years as the tough-guy mayor of the southern city of Davao, where crime rates and growth often outshone national trends, made him their man.

Instead, Duterte mostly rested on Aquino's laurels. The nearly 8% growth bequeathed him by Aquino convinced Duterte that his first priority was fighting a bloody war against drugs, not economic dysfunction. Investing in education and internationalizing investment laws to support startups could also wait, as well as weaning the economy off its worst excesses, such as corruption, which is now making a comeback.

Between 2018 and 2019 alone, Manila's standing in Transparency International's annual corruption perceptions index fell 14 notches to 113th, back toward the 146th place ranking that Aquino inherited when he took office in 2010. Another headache is Manila's addiction to remittances, which plunged 19.3% as COVID-19 has made overseas jobs scarce. While Manila claimed the record $33.5 billion of cash sent home in 2019 from Singapore, Dubai and New York as the economy's secret weapon, what they really meant was that people are the Philippine main export.

Remittances drive domestic consumption, support property prices and fill government coffers, but deplete the local labor pool. And they are a leading cause of smugness among Philippine lawmakers. Why create good jobs at home when you can just ship more bodies overseas and leverage the proceeds?

Indonesia faces its own reckoning. Last week, the Asian Development Bank predicted a nearly $109 billion drop in remittances this year as the pandemic slams jobs and incomes everywhere. Asia's take of overseas cash flowing in could drop to $54.3 billion, about one-fifth of previous years.

Jakarta's other vulnerability is collapsing oil prices, with roughly 43% of Indonesia's remittances flowing from the Gulf states. This cash shortfall makes Jakarta's twin current-account and budget deficits harder to finance, and it is a loss of vital support for families in the fourth-most-populous nation.

Jokowi notched up important reforms in his first term such as accelerating infrastructure investment -- a vital undertaking for an archipelago of 17,000-plus islands -- slashed budget-busting subsidies, and increased tax collection.

Once GDP topped 5%, though, Jokowi throttled back on further retooling. Now he has to resort to experimenting with the central bank buying bonds directly from the government to boost demand. Economists worry this so-called monetization might reward bad behavior and fuel inflation.

Jokowi throttled back on further retooling.   © AP

Similar tales of complacency can be found across the region: Thailand's generals-turned-politicians have put public order above upgrades; Malaysia's infighting politicians abdicated leadership to the central bank; Singapore prioritized exports over creating a Silicon Valley East.

Yet the COVID-19 crisis, on top of U.S. President Donald Trump's trade war, puts the costs of mass contentment in stark relief. As new hot spots emerge in Manila, Jakarta and elsewhere, Southeast Asia could pay a high price for not getting into better economic shape when global conditions were healthier.

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