Coronavirus and the Timor-Leste Economy
The world now faces a Coronavirus-induced economic crisis, and Timor-Leste will be affected just like any other country if one looks at it logically. The Timor-Leste Government has faced its share of challenges in recent times, and they are dealing with them in a mature fashion, experiencing democracy in action.
However, this world-wide slowdown will have a deep flow-on effect on their economy, like others. The downturn in goods leaving China causes supply chain issues which affect every player right through the country, from raw materials suppliers to manufacturers, to shippers, transport companies, importers, distributors, wholesalers, retailers. This results in a shortage of goods in the market, a retail slowdown, and less liquidity throughout the system.
In the Australian Financial Review on the 10 March, Jennifer Hewitt said ‘The initial shock to supply chains is now extended to stuttering economic growth everywhere as entire populations contemplate working from home, going out as little as possible and shutting down many areas of consumption’.
The Timor-Leste economy is weak due to the past two years of slowdown caused by political instability and the annual budget not yet being approved – a result of understandable democratic growing pains. I hope and pray the politicians will approve the budget, and then like so many other countries, they need to look at stimulus options as a matter of urgency.
As a small country with an emerging economy and limited business investment, their options are more restricted than larger economies. But, on the upside, having a small population and a low GDP, means simple initiatives could go a long way to providing some protection for the economy. And their ongoing lack of foreign and internal tourism may be a blessing in disguise on this occasion, lending some level of protection from infection and no additional shock from loss of tourism income.
During his time as Prime Minister in 2006–2007, José Ramos-Horta reduced import charges and dropped electricity prices from US$0.24 cents/unit to US$0.12 cents/unit to bring them into line with most ASEAN countries – an enormous benefit to the community and to business. When the global financial crisis hit shortly after, this saving made a substantial difference to the bottom line for business. However, prices have now reverted to the US$0.24 cents/unit for usage above a certain level, essentially creating one price for families and one for business.
When Timor-Leste faced the 2008 global financial crisis, it's then embryonic trade, investment, and finance sectors meant it was somewhat protected. That said, proactive financial planning and fortuitous agricultural results after a bumper coffee crop, meant the country weathered the turmoil extremely well. The government stimulus included cash payments totalling around US$100 million to the elderly and the vulnerable, and pensions for former public office holders and ex-combatants. The resulting increase in liquidity and a sharp rise in domestic demand (imports rose from US$176 in 2007 to US$353 in 2008), had a flow-on effect that it also helped the social stabilisation process of the then young country. These factors helped the country to achieve economic growth of an impressive 12.8% that year, while most of the world was in crisis.
The current government needs to reflect on their 2007–2008 success as the world faces the coronavirus and decide what economic stimulus they will provide in 2020? They will no doubt look with calm clarity at their options, but they will have to look outwards to see what other countries and economic regions are doing to overcome this crisis.
Their neighbour, Indonesia, acted swiftly in the last week of February, announcing as a first response US$742m stimulus package to ‘support economic growth’. And this was before any cases appeared in the country. The package is broad-based and includes an interest rate cut, financial incentives for the tourism, airline, housing sectors, and very creatively, for social media influencers who can help attract tourists to the country. The government will also waive taxes on hotels and restaurants in the nation’s top 10 tourist destinations, initially for three months starting 1 March. I should think that the tourism incentives might well be popular within the industry but won’t get fearful tourists into planes.
I have today been looking at suggested responses from the world’s key political and trading groups, the OECD, APEC, ASEAN, and the EU to see what they recommend as incentives.
Dr Laurence Boone, OECD Chief Economist, in her presentation Coronavirus: the world economy at risk, provided detailed analysis and recommendations to governments which included:
Increase resources to the health sector
Increase temporary cash transfers to vulnerable households
Expand short-term work schemes
Reduce or delay tax payments for companies in affected sectors
Expand availability of credit to businesses
Pay outstanding monies due to private sector suppliers
Provide liquidity if markets dry up in the marketplace
Boone believes that governments must unite to restore confidence and sustain demand through a coordinated fiscal, health, and monetary response. This, she said, would send a strong message of confidence and if the G20 governments adopted this approach, it would lead to recovering of all expected financial losses due to the corona crisis within the next two years. But to achieve this, governments need to act swiftly. She was clear in stating that coordinated G20 action would create positive ‘effects through trade and improved confidence, resulting in a larger overall output gain in each country than if they acted alone’.
In a part of the same report, the OECD suggested that a well-targeted fiscal stimulus for increased investment spending would be preferable to measures directed at household and corporate income. For example, increased government investment spending, such as bringing forward planned repairs and maintenance of public sector infrastructure, could help provide a short-term stimulus.
APEC, in The Economic Effects of the Coronavirus on the Asia-Pacific, concurred with the message of cooperation, saying, ‘[i]f past outbreaks have taught us anything it is that the region can bounce back, so long as economies cooperate and put in place the right measures.’
In a recent meeting of ASEAN and China foreign ministers, a range of economic measures was agreed upon to sure-up supply chains, support micro, small, and medium enterprises, and to promote e-commerce and fintech. The aim is to sustain economic activities until the traditional business can resume. This move focusses on the region’s successful internet infrastructure that allows some degree of business-as-usual for the retail sector – and potentially for the online industry to grow during this period. As The Diplomat reported in ‘China, ASEAN Band Together in the Fight Against Coronavirus’, SARS transformed Chinese digital commerce; coronavirus may well do the same for the broader Southeast Asian region. With people avoiding crowded shopping malls and other public groups, this seems a sensible approach and a potential economic upside.
In Europe, the European Central Bank is focussing on cash injections; however, the European Union seems at this point to be avoiding any unified action for a wait-and-see approach. Unlike Italy, France certainly sees no need to act decisively: ‘We will not paralyze the economic and social life of the country’, said the health minister, Olivier Vean last week. Perhaps in response to this laissez-faire attitude from parts of Europe, President Trump today announced a 30-day ban on travel from most of Europe to the United States to protect Americans from one sector of the globe.
On the 12 March, the Australian government announced a AU$17.6 billion stimulus package, with a focus on addressing consumer demand and immediate cashflow issues for business, particularly for small- medium-sized businesses and those in regional areas. Three out of every four dollars of the AU$17.6 billion will be directed towards business, to keep people calm, bolster confidence, and to help businesses stay afloat so that people remain employed. And importantly, it shows a commitment to seeing this crisis through. The package includes immediate write-offs for business investment, protection for apprentices who risk being laid-off during a downturn, increased social security payments, a one-off payment to those receiving family tax benefits, the waiving sickness allowance waiting time for casual workers, and AU$1 billion to support the tourism industry. Quite a wide-ranging initiative.
Returning to Timor-Leste, what actually is required? Certainly, an approach that considers each aspect of the economy comprehensively. Interest rate cuts are not suitable for Timor-Leste; the economy does not work like Australia. With tourists only accounting for around 1% of visitors, they will notice very little loss in that sector – unlike Indonesia. With oil prices also falling, there is no immediate good news likely from the Timor Sea. Perhaps this crisis presents an opportunity for Timor-Leste to join other Southeast Asian countries and take similar measures to remain liquid.
Where the government could provide a stimulus is to businesses along the full length of the supply chain in the form of tax cuts, to sure-up the retail sector. Domestic tax revenue is around 12%; a relatively low percentage of GDP. By comparison in Australia, tax revenue accounts for around 23% of GDP. So, scalable and easily implemented cuts on income tax, withholding tax, turnover tax, import and sales tax, and service charges, could have an immediate impact on business cash flow and confidence, with little effect on government coffers. A small but positive concession to visitors could be to waive the visa cost of US$30 which is payable on arrival in the country.
Then there are options such as reducing electricity prices for businesses, or perhaps even for the whole community. With more than 80% of the population now supplied with electricity, that would provide a simple and positive impact on household finances.
These measures would help citizens remain employed and confidence retained – or perhaps even boosted if the Timorese people see that their government is on the front foot with decisive action. The government certainly has this opportunity at its feet now.
Reading
OECD.org: ‘Interim Economic Assessment Coronavirus: The world economy at risk’, 2 March 2020, – http://www.oecd.org/berlin/publikationen/Interim-Economic-Assessment-2-March-2020.pdf
New York Times: ‘Factbox: The Economic Remedies for the Coronavirus’, 7 March 2020, https://www.nytimes.com/reuters/2020/03/07/world/europe/07reuters-health-coronavirus-economy-policy-factbox.html
New York Times: ‘Europe, With Eye on Italy Coronavirus Quarantine, Plans Next Moves’, 8 March 2020, https://www.nytimes.com/2020/03/08/world/europe/coronavirus-europe.html
East Asia Forum: ‘Managing Asia’s coronavirus response’, 16 February 2020, https://www.eastasiaforum.org/2020/02/16/managing-asias-coronavirus-response/
East Asia Forum: Coronavirus’ economic impact in East and Southeast Asia, 4 March 2020, https://www.eastasiaforum.org/2020/03/04/coronavirus-economic-impact-in-east-and-southeast-asia/
The Diplomat, ‘China, ASEAN Band Together in the Fight Against Coronavirus’, 4 March 2020’, https://thediplomat.com/2020/03/china-asean-band-together-in-the-fight-against-coronavirus/
ASEAN Briefing, ‘The Coronavirus in Asia and ASEAN – Live Updates by Country’, 10 March 2020, https://www.aseanbriefing.com/news/coronavirus-asia-asean-live-updates-by-country/
The World Bank, https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS
IMF Country Report, July 2009, https://www.imf.org/external/pubs/ft/scr/2009/cr09219.pdf