How is Indonesia’s Economy Coping with COVID-19?

How is Indonesia’s Economy Coping with COVID-19?

by April 8, 2020
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The hullabaloo surrounding the most contagious global pandemic in recent years is having a devastating impact on the Indonesian economy. According to Statista, 57% of Indonesians believe that the current COVID-19 outbreak will have a major impact on the national economy, while 75% of Indonesians believe that a major impact on the international economy will result.

These perceptions are important insofar as they shape speculative sentiment on the ground, and at institutional trading enterprises across the country. The poll was conducted by J. Muller on March 24, 2020, in the days after the Indonesian president publicly confirmed the first 2 cases in this populous country. Yet, bullish sentiment prevails at certain levels of government where the central bank estimated 5.4% growth rate for 2020.

The Indonesian Economy in the Wake of the Coronavirus Pandemic

Manufacturing activity across large parts of Asia has shuttered as the pandemic blazes a trail around the world. Much of China’s manufacturing capacity has been put on the backburner as global demand slumps. This has had a ripple effect on multiple sectors and industries of the Indonesian economy, notably tin, coalmining, and nickel.

The coal miners have been particularly hard-hit, what with reduced demand from China, and a local economy that has virtually ground to a halt. This is evidenced across the board with traders on international markets shorting coal, and metals like tin and nickel with providers such as FBS. Futures trading is largely bearish, as a hedge against the current market downtrend.

Short-Term Relief from Carbon Emissions Meaningless in the Long-Term

While environmental activists may be quietly cheering this period in our history, for the limited carbon footprint on the environment, the long-term repercussions on people’s livelihoods are grim. The mining companies of Jakarta have been particularly hard-hit. From an economic perspective, the coronavirus pandemic has spared no industry, no sector, and no investment portfolio anywhere in the world. From a health perspective, projections indicate that millions of people will likely end up being infected, with hundreds of thousands of deaths. This is the grim reality of COVID-19.

Unfortunately, the hiatus in manufacturing capacity will likely be replaced by a massive and unprecedented return to production when all the industries go into overdrive. From a coal mining perspective in Indonesia, revenues and profitability are flat. Coal miners have nowhere to sell their product, what with China’s economy contracting substantially during this period. Not only will international demand for one of Indonesia’s chief exports decrease, domestic demand has all but evaporated. Much the same is true for other metals such as tin and nickel, which also rely heavily on Chinese demand. The Chinese workforce at various smelting facilities across Indonesia is not allowed to return, because the country is on lockdown. This has hampered production, in Indonesia much like it has all over the world.

Prices of Metals Plunge as Coronavirus Begins Insidious Advance

Many state-owned enterprises such as PT Timah and so forth are expecting output to be slashed by despite the price of tin plummeting on global markets. Since tin is used in manufacturing, the pandemic has reduced global demand, and with it the price of tin. While China bears the brunt of the pandemic in Asia, Indonesia is expected to feel the fallout at a later stage. The Jakarta Post recently ran an op-ed indicating that COVID-19 will, ‘…slash Indonesia’s growth to 2.1% as millions may slip into poverty: World Bank.’ This flies in the face of earlier predictions of a 5.1% growth rate.

The World Bank predictions are based on best case scenario economic forecasting with just 1 month of quarantine/stay-at-home, and mobility restrictions affecting economic activity. If the coronavirus pandemic persists for several months, the economic fallout will be devastating. Exports/imports are expected to shrink by 2% – 7%, while household spending is forecast to drop to just 1.5%. The latest statistics (April 5, 2020) indicate that over 2273+ people have been infected, with 198+ deaths and counting. While this pales in comparison to the USA with over 330,000 cases, 9325+ deaths, and thousands of new cases every day, it is still a worrying trend in a populated and impoverished nation. The World Bank believes that as many as 11 million people could slip into poverty in Indonesia and other East Asian Pacific nations. This is worlds apart from forecasts of 35 million people being lifted out of poverty this year in the absence of coronavirus.

The problems faced by indigent population groups are going to be exacerbated by the pandemic. The healthcare sector is in dire need of PPE, and the government has earmarked $9.77 billion for this purpose. The Indonesian government is also seeking to establish plans for dealing with the after-effects of the crisis, by way of increasing the government deficit to more than 3% of GDP. Various stimulus packages have been implemented in Indonesia, first on 25 February, then 13 March, and 18 March. The total value of these stimulus packages is $12 billion. Additional assistance is being worked on.

Poorer Countries at Significantly Greater Risk

The socio-economic ramifications of a global pandemic in a poor country are particularly alarming. The country has 270 million people, with a total state budget equivalent to that of the state of New York ($180 billion in 2020). The difference is that New York’s state budget supports 20 million people, not 270 million people. From an international perspective, Indonesia has a relatively modest debt to GDP ratio of around 30%. The government under President Joko Widodo has proposed an increase to the annual budget deficit of 5% of GDP. Another important fiscal measure implemented by the government is a 6-month income tax exemption for employees in manufacturing earning up to $12,500 per annum.

From a currency perspective, the rupiah was trading around 14,000 to the USD in February, rising to 17,000 at one point and now hovering around 16,000. The Bank of Indonesia has been hard at work to aggressively intervene with a series of rescue packages. On the proviso that the rupiah stabilizes, the Indonesian economy is expected to recover, but if the currency craters, interventions are expected from the IMF for emerging markets to prevent them from buckling under the strain of trying to make good on international loans under the stress of depreciating currencies. Fortunately, the country is headed by highly professional individuals both at the Ministry of Finance and Bank Indonesia. Rather than focusing on divine intervention like the health minister did, the Finance Ministry and banking officials are likely to adopt aggressive, tangible measures to keep the economy afloat.

 

Featured image credit: Pixabay

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