5% growth rate in 2021? Just an illusion!

Anthony Budiawan Managing Director of Political Economy and Policy Studies (PEPS)

IO – Indonesia’s economy contracted  in  2020.  In  other  words,  the country  posted  negative  growth. On  a  year-on-year  basis,  growth in the second and third quarter of 2020 was recorded at -5.32% and -3.49%, respectively. Cumulatively, growth by the end of September 2020 was -2.02%.

The recession persisted. GDP growth in the fourth quarter is estimated to be still in negative territory, which may bring 2020 full-year growth to -2.5%.

Buffeted by the Covid-19 storm which has only got worse, the government projected that the economy in 2021 will grow by 5%. Many experts believe this is mere wishful thinking—an illusion! Like asking for the moon. What factors could possibly boost the economy to 5% growth rate in 2021? It almost beggars belief.

Perhaps this figure was picked up from an international institution predicting Indonesia would see a V-shaped recovery. This means that the economy in 2021 will skyrocket, with GDP growth of at least 4.5%.

Now, let’s look at the 2020 economic performance. As of the end of September 2020, Indonesia’s nominal GDP, sans exports and imports, was down by Rp468.4 trillion to Rp11,401.4 trillion from Rp11,869.8 trillion in the same period last year. This difference already accounted for fiscal stimulus, with a budget deficit of Rp682.1 trillion and an increase in government spending at Rp246.6 trillion.

By the end of 2020 (sans exports and imports), it was predicted to decrease even further, to Rp600 trillion, with a budget deficit of around Rp1,000 trillion and government spending at Rp2,550 trillion.

Amid the downturn, the government said the economy in 2021 would grow by 5%. This means that the 2021 economy will be larger than that of 2020 and 2019. In other words, the economy in 2021 will increase by at least Rp1,000 trillion over that reported for 2020.

The question is, where will the additional Rp1,000 trillion come from? Public consumption? Fiscal stimulus (government spending)? Investment? Is it possible that the total sum will be Rp1,000 trillion? Despite all evidence pointing to the contrary, that it has yet to recover. In fact, it could get worse.

First of all, the Covid-19 situation in Indonesia is getting worse. The positivity rate, namely the ratio of positive cases to the number of tests conducted, soared to above 20%. The public, especially the upper middle class, are increasingly worried about perceived failure of containment methods. While the first wave has yet to recede, a more deadly second wave awaits.

Secondly, the failure to contain COVID-19 will lead to weak consumption for the upper middle class. This is the group with a strong purchasing power and a high savings rate. This will in turn hinder economic recovery, resulting in stagnating business and economy; this will in turn eventually hamper job creation.

At the same time, the purchasing power of the working class and the informal sector is still weak. The unemployment rate is high. Jobs are hard to find. This group is looking forward to fiscal stimulus and cash assistance to maintain their consumption.

Thirdly, the 2021 fiscal stimulus has no power to jack up the economy. It is not expansive enough. On the contrary, it tends to be shrinking. The 2021 budget deficit of around Rp1,000 trillion is relatively the same as the previous year. The interest cost is getting higher. It could range between Rp350 trillion to Rp375 trillion. And it will get worse if Bank Indonesia (BI) follows up on its plan to stop sharing the burden. This means that BI will no longer buy government bonds on the primary market at zero per cent interest rates.

Fourthly, the monetary stimulus is also ineffective, even contractive. Interest rate for commercial loan is still high. Non-performing loan is 2020 was actually quite high but it appeared to be papered over through the ‘credit relaxation’ policy. This means that customers can delay the payment of due interest and installments until mid-2021 without being considered defaulting on their loan.

However, most customers will not be able to pay interest and installments by 2021. If they are forced to do so, there will be a massive contraction. Public money will be sucked into the financial sector. The economy will crash. It looks like the ‘credit relaxation’ should be extended. Otherwise, bad credit and collateral seizure will accumulate.

On the other hand, if ‘credit relaxation’ policy is continued, the financial sector will lack liquidity as receipt on interest and installment payment are further delayed. In this case, the government must bailout the financial sector. Government debt will increase. A dilemma!

In addition, high interest rates will prevent consumers from spending on investment goods such as motorcycles, automobiles, property, TVs, refrigerators, washing machines, etc.

Sixthly, corporate investment depends on the level of public consumption. If consumption is stagnant, companies will not be able to increase their production. They will hold off expansion. They will freeze hiring new workers. So, don’t expect corporate loan to grow. They are currently in excess capacity, so expansion is the last thing on their mind.

Ongoing monetary policy with relatively high interest rates is counterproductive, as it will hinder economic recovery and hamper the effectiveness of fiscal policy.

Lastly, the trade balance and current account in 2021 will worsen. Imports in 2021 may increase due to the sharp fall in imports in 2020. Therefore, exports minus imports in 2021 will slash economic growth by at least half a percentage point.

Domestic and external debt are exerting pressure on fiscal resilience. The need for foreign debt is growing. On the other hand, global creditors are increasingly hard to come by. The government will pursue multilateral and bilateral loan agreements more aggressively. If the ‘doping’ fails, the rupiah exchange rate can slide. Depending on the amount of deficit, the exchange rate could return to Rp16,000 per US dollar or even higher.

So, with all due respect, where will the 5% growth rate come from?