Indonesia Economic Update

Indonesia confirmed its first Covid-19 case on March 2 and now has the highest fatality toll from the disease in Southeast Asia – and second only to China in Asia. On March 31, Indonesian President Joko Widodo declared a public health emergency and enacted Law No. 6/2018 on health quarantine. The details of how the law will be implemented are still unclear but a nationwide mobilization of healthcare and national security personnel is expected.

The mobilization will include opening a coronavirus emergency hospital on the uninhabited island of Galang, where authorities are repurposing a former Vietnam War-era refugee camp.

In a related side note, it is worth mentioning that Vietnam’s war experience seems to be aiding Vietnam’s fight against the virus as the government employs a warlike mobilization strategy and a tactical tracking and surveillance system to act against the outbreak, which has so far proved successful, with Vietnam containing its caseload better than anywhere in the region on a per-capita basis.

Back to Indonesia, while the island archipelago’s economic outlook prior to the Covid-19 pandemic outbreak was among the brightest in the region – spurred in part by strong private consumption and macro-fiscal stability – Southeast Asia’s largest economy is now at risk of posting its lowest growth in 20 years. The government currently expects the country’s economy to grow by 2.3% this year under its baseline scenario – the lowest level since 1999 –  or contract by 0.4% in a worst-case scenario. Like elsewhere in Southeast Asia, Access Asia Group believes the short-term outlook is bleak, but we expect a robust recovery in growth and foreign investment interest when the global pandemic subsides, as the current crisis is an exogenous shock that is unrelated to underlying issues in the local or global economy.

All the same, Indonesia stands to be among the hardest hit economies in Southeast Asia in the short term due to the high risk of an imminent explosion in Covid-19 cases that will strain every dimension of the economy and society.

Jakarta’s Monetary Response

Positively, the government has been quick to initiate a monetary response. Jakarta has announced a slew of fiscal and monetary measures to minimize the economic damage that the country will inevitably undergo, although policy specifics remain vague in some cases.

To encourage and sustain investment, the government plans to reduce corporate tax to 22% from 25%. The government will also spend IDR 405.1 trillion (around USD 25 billion) and seek to increase the permitted budget deficit cap to further combat the pandemic. Exactly how this extra budget will be used is as yet unknown, but the government says it will focus expenditure on better healthcare capacity and to stimulate the economy.

The government also has several fiscal measures planned that are largely aimed at providing social-safety nets. With limited fiscal resources, the government is targeting its fiscal policy at the most vulnerable. Direct-cash assistance (BLT) will be provided to 29.3 million people, or 40% of Indonesia’s poorest households, to maintain their purchasing power.

Non-cash food aid (BPNT) will also be given to 15.2 million registered as living below the poverty line. Additionally, the government will make pre-employment cards (Kartu Pra Kerja) – formerly intended for the unemployed – accessible to informal workers and micro-entrepreneurs who experience job and market losses. The government will also enhance the benefits of the social assistance program, Family Hope Program (KPH) for the vulnerable such as expectant mothers, special-needs individuals and infants. Nevertheless, how much financial assistance BLT, BPNT, KPH, and Kartu Pra Kerja will actually translate into remains uncertain. 

Trade and Inflation

As for international trade, Indonesia is increasing its exports to fill the gap in the global supply chain as a result of China’s declining exports. Indonesia has exempted income tax in the manufacturing sector for the next six months to boost manufacturing exports.

The government has also eased several export procedures, including relaxing the requirements for health certification, harmonized system codes for fishery and forestry production, licensing policies for the automotive industry and other legal requirements. Some 735 companies have already been deemed “reputable” and are no longer required to obtain a surveyor’s report, have received faster inspection processes, and can quickly obtain approvals for licensing. Such companies include those in the oil and gas, textile, sugar, iron and steel industries.

On the other hand, the deputy of Statistics Indonesia (BPS), Yunita Rusanti, said that Indonesia’s total imports dropped by more than 5% in February, with non-oil-and-gas imports falling by 35% and total Chinese imports dropping by nearly 50% monthly. Indonesia’s trade surplus has reached USD 2.3 billion, the highest since 2011.

This healthy trade balance, nevertheless, is threatened by the enactment of Law No. 6/2018 and price inflation, which continues due to panic buying. The implementation of Law No. 6/2018 will result in stricter restrictions of mobility, which should minimize Covid-19 transmission, but will also reduce production efficiency because Indonesia’s manufacturing industries rely on low-skilled labor.

In short, expect manufacturing exports to take a severe hit. Moreover, due to speculation about negative economic outcomes, panic buying in Indonesia will continue, leading to further price inflation. The prices of staple goods, such as sugar, have already have seen dramatic price increases. Inflation is expected to worsen as Ramadan approaches (April 23 to May 23). As dine-in restaurants and smaller convenience stores have started closing, households are expected to excessively stock supplies to sustain themselves during the fasting month of Ramadan. Price inflation will reduce exports as the cost of goods outpace prices on global markets.

Foreign Investment Hit

Indonesia faces one the worst capital outflows the country has ever seen, with nearly USD 8 billion in foreign funds exiting the country’s financial market so far this year – the majority occurring in March. With Covid-19 cases rocketing in-country and stricter lockdown policies being issued, the loss in foreign capital will undoubtedly continue.

Another outcome has been the postponement of the Omnibus Bill, submitted to the House of Representatives in February and designed to significantly ease doing businesses in Indonesia, create jobs and reduce restrictions in foreign direct investments. The bill was expected to become effective in 2020, but due to the pandemic it will likely be postponed until mid- or late-2021. Positively, Golkar Party Chairman Airlangga Hartarto has been quoted as saying that all political parties have agreed to support the bill.

Indonesia, however, is receiving increasing domestic and foreign investments for health-related businesses, particularly distributors of medical equipment. With the majority of Indonesian hospitals underprepared to treat massive influxes of patients, medical equipment is in high demand. Moreover, to prevent catastrophic losses in foreign direct investment (FDI), the head of the Investment Coordinating Board (BKPM) Bahlil Lahadalia launched a Command Center to closely monitor the flow of investment and efficiently issue business and investment permits. Bahlil also assured investors that had embarked on factory construction that the BPKM Command Center will continue to monitor and guide them through to the completion stages of their investments.

The success of these measures will depend largely on how the global economy fares in the coming months. Failures could have major political and security repercussions for Indonesia, as seen during the 1997 Asian Financial Crisis, when economic turmoil led to the toppling of the Suharto regime and a sweeping political transformation of the country. In other words, Indonesia today faces its biggest economic and political challenge in nearly 25 years.

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Access Asia Group is reaching out to young regional scholars focusing on SE Asia. For this update, research was compiled by Gabriele Natalia Siahaan, an Indonesian student pursuing a Bachelor’s Degree in International Relations and a Master’s Degree in Asian and Pacific Studies at Australian National University.