Radak: They are foolish. They do not understand the difference between our G-d and their gods. Our G-d is in Shamayim, and rules over upper and lower beings. Whatever He desires, He does. This is not so for their gods.

Malbim: This begins the third part of Hallel, until "Lo ha'Mesim Yehalelu Kah" (verse 17). It explains Hashem's constant Hashgachah on His nation, and on every person in it, according to His Avodah and level. The Goyim's question "where is their G-d" is folly. They think that Hashem removed His Shechinah to Shamayim, and His honor is there. Even though He is in Shamayim, He does whatever He desires - He conducts, rules and oversees as He desires.